As Toronto’s real estate market continues to struggle amid the Bank of Canada’s aggressive campaign to hike interest rates, some agents say that they are increasingly hearing from buyers of pre-construction condos who are worried about closing the deal.
Realtor Jordan Scrinko, of precondo.ca, a website portal for pre-construction projects in Canada, said several of his clients have expressed concerns about being able to afford their pre-construction investment, which many purchased when interest rates came in at under two per cent.
After seven lending rates hiked in 2022, the BOC’s policy interest rate is now at 4.25 per cent.
In order to obtain a mortgage, all buyers must pass a stress test that determines how much they can afford to borrow and pay each month if interest rates go up. The minimum qualifying rate is either the benchmark rate of 5.25 per cent or the rate offered by a lender plus 2 per cent, which ever is higher.
Last month, Scrinko and his team worked with roughly 70 clients who had purchased pre-construction units in two large Toronto condominium developments.
“Everyone successfully closed, but it was a lot of work. … There was a lot of putting out fires,” he said, adding in some cases clients used private lenders to complete their deals.
“There were definitely some clients who came to us to liquidate their units before closing,” he said, adding that he and his team always advise buyers to do everything possible to hold on to their investment.
Scrinko said buyers who purchased pre-construction tend to flip them in assignment sales – a practice in which a purchase agreement is effectively sold before a building is even completed – are now finding themselves barely breaking even or even losing money.
Like Scrinko, Ara Mamourian, a broker and the managing director of The Spring Team Real Estate, said some of his clients have also begun inquiring about how they can get out of their developer purchase agreements.
Mamourian said it is OK for buyers who are closing soon to feel concerned about how they’ll be able to afford their pre-construction property.
But, he said it “is not the time to panic.”
“A lot of people are very scared about interest rates, but they can still close. … There are so many options out there one way or the other not to lose a property,” he told CP24.com.
“Most people should do what ever they can to complete the deal. My number one advice is to do what ever you can to hold on to a property. Your future self will thank you.”
Mamourian said this especially applies to those in the Toronto market, where the average price of a home across all property types has now declined by 9.2 per cent year-over-year.
“I’m expecting good news from the Bank of Canada, maybe not (an interest) rate drop, but I think there will be a halt to the hike cycle, hopefully by March,” he said.
“We’ve seen worse times in the (housing) market. … In the grand scheme of things, the market as a whole will be okay.”
More than 30,000 new units to be completed in 2023
Research from Urbanation has suggested that a record 32,000 new condominium units will be completed in the GTA in 2023.
Mamourian, whose firm says roughly 20 per cent of its business in pre-construction condos, said people who invested in the market with a long-term intention of holding, moving in, or renting it should be in good shape.
However, those who purchased this type of property to make a quick buck without fully understanding what they were getting into, could face some challenges, he conceded.
“There are some people who are in a lot of trouble and are going to lose money in this market now,” he said, adding in many cases those buyers put their faith in a “bad apple” agent who did and said whatever it took to make a deal.
Nonetheless, Mamourian said he didn’t expect there would be a flood of cases like this.
“We aren’t seeing scenarios where a huge chunk (of a property) can’t close,” he noted, adding in a 500-unit condominium there may be 15 or 20 units that a developer takes back and sells again once the market better.
“What’s happening isn’t putting developers in dangerous positions.”
Dave Wilkes, the president and CEO of the Building Industry and Land Development Association (BILD), said many buyers who purchased a pre-construction unit two or three years ago are understandably stressed when it comes time to close as the market has “quickly and dramatically” changed so much since then.
He said he wanted to see changes made now to stabilize this segment of the housing market, including adjustments to the stress test.
“The stress test was put in place when (interest) rates were much lower. Now that the interest rates are up, the stress test is really redundant,” he said, noting rates are currently at or near their peak and aren’t likely to climb much higher.
Secondly, Wilkes said the BOC needs to not overshoot its market cool down targets by rising interest rates too high.
“We don’t want to see the market soften too much. That’ll lead people to stop buying and developers to stop building because there’s not enough demand,” he said.
“There are a lot of unintended consequences.”
