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Real estate market storm clouds are gathering



A home for sale in Toronto’s Annex neighbourhood on July 18.Fred Lum/The Globe and Mail

Real estate industry professionals who help homeowners grapple with rising interest rates and crushing debt are trying to keep up with the volume of new business these days.

“We’re aware that the storm is brewing and likely to get worse,” warns Toronto-based real estate lawyer Mark Morris.

Today credit has tightened, extensions are rife and defaults are rising, says the principal with The process of buying and selling was “very clean” when there was an abundance of money flowing through the system, Mr. Morris explains, but now that stream has slowed to a trickle.

Some buyers appeal to sellers for more time to come up with the financing they need to close a deal, and defaults are also rising, says the lawyer, who has 15 to 20 problem files on his desk on a given day. Purchasers planning to rely on a home equity line of credit, or HELOC, to buy an additional property are finding that avenue closed.

Mr. Morris is carefully watching the new build segment, where he sees peril ahead. He points to the many people who signed a contract with a builder before construction on a new project began. A number of those buyers count on being able to sell the contract to another party without ever taking possession of the property.

When prices were rising rapidly, speculators often made hefty profits on so-called assignment sales.

He sees complications on the horizon because many of those original buyers cannot afford to finalize the purchase when the unit is finished – especially in today’s economy.

In order to rein in inflation, the Bank of Canada has raised its benchmark rate four times since March to its current level of 2.5 per cent.

Few people will be surprised to learn, Mr. Morris says, that lenders were often lax in extending financing to builders without requiring strong proof that their buyers in the pre-construction market were property qualified.

Investors on shaky financial ground are facing the completion of their units without the ability to trade in the unregulated assignment market.

“That market is now illiquid,” Mr. Morris says. “Buyers will find they cannot assign the product away if they can’t afford it.”

In the current environment, Samantha Brookes, chief executive of Mortgages of Canada, is advising prospective buyers they cannot skip any steps in applying for a mortgage pre-approval. Lenders have become much more stringent about making sure a borrower is creditworthy.

“They want documents up front,” she says. “Consumers have to know they have to have their information ready.”

While interest rates have been far higher in previous decades, the debt levels consumers carry today swamp those of the past, Mr. Morris says.Fred Lum/The Globe and Mail

In some cases, Ms. Brookes is seeing three or four people from one family applying for one mortgage in order to buy a property.

“The parents and the kids are all on title just to buy one home,” she says. “They’re trying to make it work.”

Ms. Brookes urges buyers in the current market to make sure that their offer is conditional on financing.

“Do not waive any type of conditions on financing, no matter what anyone tells you,” she says.

Ms. Brookes also recommends that buyers have a short closing period of four or five weeks in order to avoid the problem of the property declining in value before the appraisal is complete.

As rates have shot up, Ms. Brookes says, her firm has had to cut back on its marketing because they are overwhelmed with clients who need to refinance an existing mortgage or they run into problems when the loan is up for renewal.

“A lot of people are looking for solutions.”

In the most dire cases, a homeowner may have had a fixed-term mortgage with an interest rate of 1.89 per cent, for example, only to have the lender present them with a rate of 5.89 per cent at renewal.

“A lot of them already have sticker shock,” she says of the consumers renewing today.

Ms. Brookes can often find a resolution for borrowers by extending the amortization period, which can stretch to as long as 40 years, she says.

“We stop bankruptcies quite frequently.”

Some homeowners have let things slide to the extent that they have defaulted on mortgage payments, received letters from the lender, and eventually had the bank foreclose.

“We have people come to us who have already been locked out of their house by the sheriff,” she says. “They leave it until the last minute.”

Ms. Brookes says mortgage brokers can help some borrowers in such a predicament refinance, pay the arrears and pay the fees and penalties that pile up on a daily basis.

She figures that more homeowners are going to be facing financial challenges as rates continue to climb and more mortgages come up for renewal.

“I do believe by September or October we’re going to see a lot of people jump ship.”

Mr. Morris sees significant risk in the heavy debt loads that many Canadians have accumulated in recent years. People have borrowed against their home equity to pay for major expenditures in the past, but the practice of drawing HELOCs for everyday expenses has accelerated in recent years, he says.

A home for sale in Toronto’s Annex neighbourhood on July 18.Fred Lum/The Globe and Mail

“People started using houses as bank accounts five or six years ago,” he says, pointing out that people who borrow to maintain their lifestyle continually need to borrow more. “I’m not certain people appreciate how much homes have become part of salary,” Mr. Morris says.

Household budgets are already becoming stretched, he says, and the Bank of Canada is likely to raise rates again at upcoming meetings.

Many Bay Street economists are expecting the central bank’s key rate to end up at 3.25 per cent or 3.5 per cent this year as policy makers try to tame runaway prices. Inflation in Canada reached an annualized rate of 8.1 per cent in June to mark a four-decade high.

The central bank has identified lofty levels of household debt and rich home prices as the top two vulnerabilities in the country’s economy. Bank of Canada governor Tiff Macklem says his primary focus is getting inflation back to target.

While interest rates have been far higher in previous decades – rising above 20 per cent in the early 1980s – the debt levels consumers carry today swamp those of the past, Mr. Morris adds.

Mr. Morris fears that higher debt-servicing costs could lead to a tipping point that forces a wave of people to sell their homes at the same time real estate prices are in decline. The combination can lead to a downward spiral, he warns.

Meanwhile, the buyer’s remorse that saw real estate deals falling apart before closing has calmed down after the tumult of early spring, he says.

At that time, buyers who purchased in the heady days of February and March were sometimes distressed to find that prices had fallen in the two to three months between the time the agreement was struck and the deal closed.

“Suddenly people were caught in the shift because they had no knowledge of what was coming,” he says.

The transition was painful for people who had purchased a new home before selling their existing property, he says.

“That type of deal has largely worked its way through the system,” he says, because most sales that took place when prices were at their peak have already closed.

Now he is dealing with the upheaval of tighter credit and higher rates.

“Rising interest rates are really, really really, starting to bite.”

A wave of listings is already here, he says, adding that the wave is likely to swell.

At the same time, borrowers who need to go to private lenders for a second mortgage are facing interest rates of 18 per cent or more, Mr. Morris says.

Mr. Morris has harsh criticism for Mr. Macklem and his assurances to Canadian businesses and consumers in July, 2020 that interest rates would remain low for a long time to come.

“People relied on it,” Mr. Morris says. “It was extreme negligence to give the assurance, even with the storm clouds brewing.”

Mr. Macklem recently reiterated his view that a soft landing is possible for the Canadian economy.

Mr. Morris believes that the only scenario that might save the real estate market is a recession. A contraction in the economy may already be underway, he adds, and that in turn could lead the central bank to lower interest rates once again.

Still, he is not hoping for that grim outcome because it would cause severe economic pain.

“It brings hardship on people. It’s going to be very difficult for many Canadians.”

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Real estate markets slow in most nearby communities – Calgary Herald



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Slowing demand and rising supply in outlying communities like Airdrie have set in along with cooler temperatures of late summer, recent data shows.

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Calgary Real Estate Board statistics from last month show sales falling year over year in most communities while supply is rising.

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“In all those markets, we’ve seen improvements in inventory,” says Ann-Marie Lurie, chief economist with CREB.
“Still these markets remain quite tight, but we are seeing some price adjustments and that’s because they came up so high during the pandemic.”

Airdrie is the largest and most in-demand market with the highest sales last month, 169 transactions, down almost eight per cent year over year. Still, the community saw inventory rise more than 10 per cent with now more than 1.69 months of supply, an increase of nearly 20 per cent from last year.

Other communities have also seen sales fall and supply rise. These include Cochrane, which had 75 sales, down about 17 per cent from August last year. Its supply is now more than two months, up about 26 per cent year over year.
Okotoks had 53 sales in August, down about 19 per cent year over year while supply grew to more than 1.8 months.

Despite falling demand and growing supply, prices still grew year over year in these communities. The benchmark price in Airdrie increased almost 19 per cent to $493,500. In Cochrane, the benchmark price grew by more than 16 per cent to $517,400 while the benchmark reached $549,300 in Okotoks, also an increase of more than 16 per cent.

Chestermere saw the biggest drop in sales year over year at more than 48 per cent.

Only High River experienced a slight increase in activity with sales last month up 2.5 per cent versus the same span last year.

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Spotlight: Making sense of the current real estate market in Newmarket –



Buying a home at any time is a huge undertaking. It requires a lot of preparation, time and access to expertise.

Homeowners—and those who wish to become one for the first time—have it even harder right now, with conditions seeming to change from month to month.

REALTOR® Dave Starr specializes in home buying and selling in Newmarket and the surrounding areas. With over 35 years of experience in the real estate industry, he is happy to share what he’s learned with others.

Slowing things down

So how would he describe the current state of the market in Newmarket? “It’s finally more normal and realistic,” he says. “A prospective buyer has a little more breathing room to make sure that their financing is in place and they can also consider a home inspection.”

A seller will benefit by working with a more seasoned agent, he says, because they have had prior experience with similar markets. He likens the situation to a professional athlete who has played in the playoffs before or competed in a large-scale event like the Masters in golf.

Earlier in the year, the market was not realistic.

That tended to leave buyers, sellers and agents scrambling. “The end result can be a situation with buyer’s remorse, where the buyer no longer wants to close on their purchase. The banks sometimes struggle with appraisals, which can also result in a non-closure,” he says. “In the fast-paced market that took place earlier, some agents potentially made more mistakes, especially since they weren’t experienced enough to handle multiple offers.”

Home inspections and interest rates

While some homes may not require a home inspection, there are lots that definitely need one. “In an extremely busy market, buyers could potentially end up with an unwanted surprise—at a great expense,” says the REALTOR®.

He likens it to the necessity of having speed limits on our roadways. The faster you go, the more chances you have of getting into an accident.

“We are now facing an increased mortgage rate, which many would not like to see, but the truth is it will help balance the market overall. Lower interest rates basically were one of the reasons for the inflated house prices and homeowners were simply taking on larger mortgages than ever,” he says.

For years many homeowners would tell him the same thing: that mortgage money was cheap to them. His answer to that never varied: “You do know you have to pay it back at some point.” If the rate were guaranteed for a lifetime, it would be a different story, but of course that’s not the way it works.

The market over the summer was slower but typical; that has become the norm over the past few years.

The fall market is already starting to pick up, with increased activity, though the number of listings in Newmarket is quite low. Rental availability is both quite expensive and experiencing a shortage.

Says Starr, “The market moving forward should remain stable. Buyers and sellers will have more time to make the best educated decision for their needs and wants.”

Whether you’re a buyer or a seller, he welcomes any calls or emails.

Let Dave Starr Real Estate help you make your next move. Call 416-520-3231 and get the Starr treatment you deserve.

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Commercial Real Estate Sector Faces Risks as Financial Conditions Tighten – International Monetary Fund



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Commercial Real Estate Sector Faces Risks as Financial Conditions Tighten  International Monetary Fund

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