Many sellers prospered from the hot market conditions and received the value for their home that they originally envisioned. But when news was released on April 21st that measures would be implemented to cool off the market, some were not so fortunate and those sellers were caught in the transitioning real estate market. We are currently witnessing a shift from a strong seller’s market depicted by 1 months of inventory to a weaker seller’s market depicted at 3.3 months of inventory.
Homeowners thought by purchasing a property during the early part of the spring and then delaying the sale of their home until the later part, they would be able to capitalize on higher returns. However, when the Ontario government released its news the market shifted.
Once this happened there was a surge of listings that entered the market. In one day, there were 138 listings added. The following day there were 85 listings by the afternoon. The news coupled with the influx of listings caused hesitation for the buyers. Suddenly, there was choice and buyers were not forced into making decisions. Buyers now had the upper hand and were making offers on properties below their list price. Sellers who had counted on the sale of their home to finance the purchase of the next one were left scrambling.
Even if the seller had managed to sell their home at a lower price financing has proven to be more challenging. Banks have tightened their rules when qualifying individuals for mortgages. Homeowners need to pass the “Stress-Test” which qualifies someone for a mortgage at 4.64% amortization over 25 years. Certain banks have also introduced tougher rules for foreign buyers. Specifically, the Bank of Montreal will qualify a foreign buyer for a mortgage if they have a minimum of 35% down and for only up to $1-million dollars, down from $2-million.
Many of the communities north of Toronto have seen a drop-in sales month over month. Communities such as Markham, Unionville, Stouffville and Richmond Hill are stocked with large, detached homes that command rich prices. These communities have also drawn more investors than some of the less expensive neighbourhoods.
Homeowners who have already purchased into these communities are finding out their new home is not worth as much as they originally thought. Bank appraisers are looking at comparable values of homes and appraising these properties based on their new lower value. Homeowners now take the risk of their mortgage being higher than the value of the home, a term known as “being underwater”.
What Does This All Mean?
Ladies and Gentlemen, we have been in the middle of this market shift for the past 60 days and it will probably take another 60 days to get through it. Whether this is simply a blip on the radar or a more prolonged cyclical change, time will tell. We must waver through these turbulent times before new benchmarks are set and the natural flow of real estate can begin again. Once this has all been completed agents can advise clients better, sellers and buyers will have a better understanding of the market and banks can fund mortgages more accurately. The next important question for homeowners and soon to be home owners will be faced with is: Will interest rates rise in the fall?