Condo owners at two Toronto buildings have been hit by demands for huge sums of money above their regular fees, something industry insiders say may become a wider problem even among newer buildings.
In 2022, owners of condos at Guildwood Terrace (MTCC 1013 at 3233 Eglinton Ave. East) received notice that they would need to pony up extra cash above their regular monthly fees to pay for a $12.5-million “building envelope” project that would include replacing all the windows in the complex’s two towers. The cost per resident ranged between about $25,000 and close to $50,000 depending on the size of the apartment. For some long-time residents of the building, which opened in 1992, the numbers come as a shock.
“My mum’s been here for 15 years, she’s a 98-year-old woman,” said Sandra Ryan, whose mother owns a two-bedroom unit in the building. “My dad’s just passed away and she’s on a widow’s pension; it’s really tough.” Perhaps most galling to Ms. Ryan, the project is slated to take three years. “She’s not even going to see these windows. We just gotta suck it up and pay the balance … but no, it isn’t fair.”
Management at Guildwood declined to comment on the record, but notes the board made several payment options available to residents: lump-sum one-time payments, annual payments or monthly payments. Another long-time resident, Rob Burridge, said the condo board messaged for years that the project was coming and he compliments them on their handling of the first special assessment the building levied in his 25 years living there.
“It’s unfortunate it wasn’t caught with previous boards. I took it that it’s not uncommon; these things do happen,” he said. “Has it affected me? Sure: disposable income is a little bit less, that’s maybe one less trip a year. I’m paying $7,800 a year [in special assessment fees], for some people that’s a down-payment on a car.”
Experts in condo management say the need for special assessments can be caused by everything from genuine disasters or age-related mechanical upgrades to a history of underfunding the government-mandated reserve funds condo buildings are required to maintain.
Up until recently, special assessments were usually seen in older buildings that either had unexpectedly large repair needs or dramatically underfunded reserves. But that pattern is changing, say some in the industry.
“With the new builds, we’ve been seeing a lot,” said Natalia Polis, an associate with Lash Condo Law. “Increasingly with new-builds the developer doesn’t allocate the correct or appropriate amount to adequately fund the reserve fund, so within a few years a reserve fund study shows they’re way under-funded.”
Coupled with an increase in common expenses – everything from management fees to insurance premiums have seen rapid inflation in recent years – many owners are feeling the pinch.
“We created condos from Day 1 to create more housing in less space, but nobody thought about condo costs,” Audrey Loeb, condo law expert and partner with Shibley Righton LLP. “I think we have among the best legislative framework for long-term repairs [in Ontario], but the problem is, we have people who can’t afford to pay for it. And boards who get ousted when they try to do the right thing.”
Whatever the reason, to say special assessments in any circumstance are unpopular would be an understatement.
“There is almost always backlash from owners, and a significant amount of work by both the board and their manager to undertake the whole process,” said Julian McNabb, vice-president with Melbourne Property Management in Toronto. “It is very stressful, emotional and extremely time consuming. … For some, it can be seen as a failure as a board to act and govern the affairs of the condominium as they should have.”
That’s how Ai Ngo feels about her building, Twin Towers (MTCC 655) at 234 Albion Rd., Toronto, which was completed in 1984. After a special assessment that amounts to about $10,000 for each owner, she joined with other frustrated residents and twice tried to force a board change in 2022 through special meetings that would recall elected and appointed board members and replace them.
According to Ms. Ngo, about seven years ago a different board completed a large-scale project to fix the building’s balconies: residents had been gradually paying off a bank loan taken to fund this work through a monthly fee increase agreed at the time. But when a new board came in, Ms. Ngo said it was announced they would do a special assessment to retire a $1.9-million outstanding debt.
“We decided to pay gradually, suddenly in 2022 we have to pay in full … without our consent, with no meeting,” she said. In Ontario, boards are not required to hold a referendum or even a public meeting on special assessments (unlike, for example British Columbia and some U.S. jurisdictions).
The combination of the levy and what she says were process barriers that disqualified dozens of the proxy votes she had collected to recall the board have left Ms. Ngo feeling powerless in her own home, and unsure if the voices of residents will ever be fairly heard. “They will have some reason to say it’s not enough. … They do whatever they want,” she said.
The building’s condo manager Leza M. Blair, with Maple Ridge Community Management (owned by U.S.-based property management giant Associa) declined a Globe request for comment.
Real estate sales were down at the end of the year across Canada
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Real estate sales nationwide continued their slide this past December with significantly lower sales than last year.
Canadian Real Estate Association statistics from December show sales declined by 39 per cent from 2021, one of the single-biggest sales declines on record year over year.
Still, activity remained just below average for the month over the last decade, CREA numbers show.
Sales had declined for several months last year following interest rate increases by the Bank of Canada to ease inflation, which increased mortgage rates. Overall, sales fell about 20 per cent in 2022 in Canada from 2022.
One bright spot in December was month-over-month sales increased about one per cent from November.
The rise did not stop price declines, however, falling about two per cent month over month in December to $626,318 in Canada.
Year over year, prices slid in December almost 12 per cent.
At the same time, newly listed properties dropped about six per cent month over month, CREA numbers show.
Lower listings helped raise the sales-to-new-listings ratio slightly in December to about 54 per cent versus 50 per cent in November. Both ratios show a Canadian market in balance between buyer demand and sellers, and near the long-term average of about 55 per cent.
Canada averaged about four months of supply in December, nearly a full month below the long-term average, CREA states.
Prices dropped across all markets — though Calgary, Regina, Saskatoon and St. John’s prices posted the smallest decreases from their peaks earlier in 2022.
CREA further noted Vancouver and Toronto weigh heavily on the data, particularly prices.
Excluding those two cities, the average price of a home in Canada at the end of December would be $118,000 lower at $508,318, it noted.
Private lenders rein in real estate borrowers – The Globe and Mail
As financial pressures intensify, real estate industry professionals are keeping a wary eye on debt-burdened homeowners – particularly those who rely on cash from private lenders.
The credit that flowed so easily from private and alternative lenders when the Canadian real estate market was climbing is scarce, expensive and sometimes unobtainable when property values fall.
Mark Morris, Toronto-based real estate lawyer with LegalClosing.ca has a growing sense of foreboding as more problem files land on his desk. The steep climb in interest rates combined with a slide in house prices may be a major source of instability in the real estate market in the Greater Toronto Area and beyond, Mr. Morris says.
“The stars are aligned for a bloodletting,” he says.
Warnings from within the industry follow seven interest rate hikes by the Bank of Canada last year that took the benchmark rate to 4.25 per cent from 0.25 per cent. Low interest rates during the pandemic spurred many potential buyers to jump into bidding wars that sent prices soaring, but the central bank’s increases extinguished the market euphoria in 2022.
Mr. Morris says most homeowners have so far been able to cope with higher monthly expenses, but the duration of the increased rates is taking a toll. Some of those who borrowed heavily against the equity in their homes are struggling to make ongoing payments.
More inventory will hit the market, he believes, and he’s already seeing more homes listed under power of sale as lenders foreclose.
“People are hurting,” he says. “The truth is, it’s going to get worse.”
Mr. Morris sees the darkest storm clouds brewing in outlying communities where real estate prices spiked during the pandemic. Many of those areas are now facing the steepest declines in average price, and debt-laden homeowners are running into trouble.
“They just grabbed on to whatever they could get. They are in a world of hurt,” Mr. Morris says of those who bought near the peak.
Benjamin Tal, deputy chief economist at CIBC World Markets, believes homeowners in Canada have been handling the burden of rising interest rates well so far. But the number of distressed sellers is likely to increase in 2023, he cautions.
“I think you will see situations in which people are tested.”
So far, the 30-day delinquency rate on sub-prime mortgages – a good leading indicator of trouble ahead – has remained well-behaved, he says, but the data points to early signs of stress.
That stress will intensify, Mr. Tal predicts.
Homeowners who borrowed from alternative lenders are more likely to come under pressure, he adds. Alternative lenders account for about 8 to 10 per cent of the mortgage market in Canada, according to Mr. Tal. That figure includes mortgage investment corporations, private consortiums and so-called mom and pop investors.
Typically borrowers resort to alternative sources when they aren’t able to qualify for a mortgage with one of the traditional “A” lenders. The “B” lenders charge higher rates and fees to offset the risk.
While Mr. Tal expects an upward trend in delinquencies, he stresses that the magnitude will be nothing like the meltdown in the U.S. sub-prime segment that led to the 2008 global financial crisis.
“I suggest it’s not significant enough to derail the market,” he says.
Mr. Tal says some borrowers on the fringes will face significant hardship at the micro level, but housing in Canada remains stable at the macro level.
“This is not freefall. This is not a meltdown.”
Amongst the homeowners seeking advice from Mr. Morris, those who purchased in 2021 or early 2022 in areas of Ontario such as Barrie, Brampton, Caledon and Stouffville are feeling the greatest pressure.
Many who bought with a typical 20-per-cent down payment and a mortgage for the other 80 per cent have seen the value of their property slide more than 30 per cent, which puts the mortgage underwater Mr. Morris points out.
He has especially deep concern for people who took out a second mortgage from a private lender at a high rate of interest and are now finding that they are not able to renew.
Homeowners sometimes take out a second mortgage in order to consolidate debts with higher interest rates, to finance a renovation, or to invest in a second property. Typically such loans have relatively short terms of six months or one year.
Today, borrowers must meet tougher standards set by lenders who are aiming to limit their own exposure, Mr. Morris says.
“Now, if they want to renew, they can’t. Even if they can, the rates are atrocious,” he says, citing a recent example of 13 per cent interest plus another 2 per cent in fees.
Lenders are calling loans in tertiary markets because house prices have fallen more than 30 per cent in some cases and they are unwilling to renew for another term.
“There is no replacement for that money – that was already money of last resort,” Mr. Morris says.
There’s also less credit to go around after “mom and pop” lenders disappeared from the market all together, he says.
Mr. Morris points to the example of a client in a location he calls “Boonieville”. The homeowner owes $300,000 on a second mortgage with private lenders. Now, at the end of the one-year term, the lender is calling the money, and the house has fallen in value from about $900,000 in April to $700,000 today.
Mr. Morris acknowledged the lenders can force a sale if the homeowner doesn’t pay, but they would not be able to recoup the amount they are owed after the first mortgage is paid.
“Your only hope is that values go up,” Mr. Morris argued in successfully negotiating on behalf of the owner for more time.
The lawyer is taking several calls a day from homeowners facing similar scenarios.
Another snag at the moment is that so many sellers decided to lease their house or condo unit when it failed to sell, the rental market is becoming saturated.
“That out is collapsing too,” he says.
Andre Kutyan, broker with Harvey Kalles Real Estate Ltd., says prices in the Toronto market have held up better than those in rural and small-town areas, but some homeowners are crippled by the large amounts they owe to private lenders.
Lenders prefer not to foreclose, but they will after too many missed payments.
“There comes a point where a lender says ‘enough is enough.’”
Meanwhile, if borrowers stop making payments, the interest continues to accumulate and penalties tend to be steep.
“Sometimes they don’t see the money coming out of their bank account and they don’t grasp that the interest meter is still running,” Mr. Kutyan says.
In Toronto, the mezzanine financing segment is often providing loans to small builders and flippers, but those investors who pool their capital and lend to them are becoming far tighter with their money.
“In the past they would ask very little in the way of questions – they would lend the money.”
Those builders often need a short-term loan while they wait for the house to sell after pouring money into construction.
If the newly completed house doesn’t sell quickly, the builder may have to cut the price drastically.
“I’ve seen guys get burned like this,” Mr. Kutyan says. “Nine times out of 10 they have to reduce. It kills their profit margins.”
Mr. Kutyan says the potential for real estate prices to plummet has sent some private lenders fleeing to other asset classes.
“They have no idea where this is going – that’s the fear.”
Samantha Brookes, chief executive of Mortgages of Canada, says her clients are finding alternative lenders have become far more stringent.
Ms. Brookes points to the example of one elderly Ontario homeowner who borrowed against the equity in the property with a private lender.
The loan is up for renewal and the elderly owner faces exorbitant fees. Ms. Brookes says the senior faces losing the house because she doesn’t have the ability to repay the loan.
“There’s no equity left,” Ms. Brookes says. “It’s getting very, very tricky.”
Mr. Morris believes the market will regain strength in the long term. Meanwhile, he has tremendous sympathy for those caught up in the abrupt shift.
“We’re all taking our medicine for irrational exuberance,” he says. “We should be very, very sympathetic.”
Bank of Canada comments offer light at the end of the tunnel for real estate, mortgage markets, experts say
Canada’s struggling real estate sector is breathing a sigh of relief, but it wasn’t so much the size of the Bank of Canada’s Jan. 25 rate hike as the language that came with it that was cause for optimism.
That’s because while the central bank boosted its benchmark overnight interest rate by 0.25 basis points to 4.5 per cent, its eighth consecutive increase, it also signalled it would put the hiking cycle on pause — at least for now.
“A 25-basis-point increase or no increase was what we needed, along with the kind of language … that indicated we were essentially where we needed to be” Royal LePage CEO Phil Soper said in an interview. “What’s important at this stage is that we’ve clearly come to a point where interest rates aren’t going to be in the news.”
Soper said the realization that rate hikes will be stopping or slowing should draw what he called the “missing transactions” — those with the capacity to buy but who have remained on the sidelines — back into the market, though it may take some time.
Those buyers, he said, have been reluctant because they understand the link between rising rates and prices, and “they don’t want to buy a house today that will be worth less tomorrow.”
Having some price certainty will make it easier for them to enter the market, but they’ll still need to be comfortable knowing they are paying five or six per cent on their mortgages while others are locked in at two per cent.
“There’s still many, many people out there with two per cent mortgage rates. Your sister or your cousin might have a two per cent mortgage rate but you’re going to have to pay five,” Soper said. “This will harm consumer confidence until the market has more time to adjust to it.”
As a result, he said he saw a “muted recovery” in the cards for the spring.
The pause also signals a light at the end of the tunnel for variable-rate holders, according to James Laird, Co-CEO of Ratehub.ca and president of mortgage lender CanWise, even if it means another dose of short-term pain.
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