Welcome to this month’s  installment of Dear Urbaneer, where I answer questions asked by my clients or inquisitive readers. This time, I am sharing my correspondence with an out-of-town dwell hunter who didn’t anticipate how common it’s becoming for Sellers to divest themselves of their Toronto real estate at a loss. 

Dear Urbaneer:

Since we started exploring  purchasing a condominium in Toronto to age in place, we’ve been surprised at how often your comprehensive property analyses reveals that the listings we’re interested in were purchased by the current Sellers not very long ago, and that after accounting for all their costs they’re likely going to take a financial loss. Why are there folks who are selling so soon after buying, and in some cases renovating, and losing money? 

Signed,

Is It Really That Bad?

Here is my reply.

Dear Really Bad:

As a Seller, what motivates you to sell your property will ultimately dictate when you sell it and how much you sell it for. I wrote about some common selling motivations in this past post which still ring true: Dear Urbaneer: Which Property Owners Are Selling Their Toronto Real Estate Now In 2023?

All property owners list their property for sale for one of two decisions. The first is the owner’s free will and choice to offer their property for sale because they want to. The second is because the owner has to. 

To give a little context around the current market: property owners who bought as long ago as 2018 have incurred losses after selling their properties this year. Despite Toronto real estate escalating in value significantly for 2 decades – when the Bank of Canada began increasing interest rates in March 2022 through July 2023 by 475 basis points in an effort to restore inflation to its baseline 2% threshold. Unfortunately, the impact blindsided a lot of property owners – particularly homeowners with variable rate mortgages who saw their monthly payments skyrocket and pre-construction condo buyers who discovered the appraised value of their soon-to-be-completed unit was worth substantially less than the original purchase price, obliging them to increase their down payment or forfeit their purchase.  Furthermore, people who took advantage of the low interest rates on their HELOCs to upgrade their dwellings now owe more money on a property that, in most instances, would garner a lower price. As the higher interest rates fueled declines in property values, the costs associated with buying and selling real estate remain substantial, resulting in an increasing segment of property owners incurring financial duress. The Toronto real estate market looks very different today than it did a few years ago. 

After 2 decades of a real estate market consistently performing on the up, a generation or two became accustomed to the false mindset that the Toronto real estate market simply couldn’t fail. It was this kind of mentality that justified Buyers paying top dollar, and maxing out on mortgage debt, because the means justify the ends, right?

With market downturns, higher borrowing costs and more, it’s a different playing field now, which has pushed the hand of some Sellers who are falling into the ‘must” sell category- which often means lower prices to facilitate a faster sale. 

Here are some reasons that people might be (and are) selling, from my point of view in the real estate trenches.

1 – Overleveraged Homeowners (Many With Variable Rate Mortgages)

Debt-laden homeowners have found themselves stretched too thin this past year, particularly variable rate mortgage holders.

This story tells a bleak tale: “Rising Insolvencies Signal Tough Year Ahead For Homeowners With Mortgage Renewals“.  Insolvencies in Canada have risen by 13.5% over the same time period last year, thanks to higher borrowing costs, alongside our higher cost of living.

Check out this similar article in the Globe and Mail: “Real Estate Insolvencies In Canada Set To Surpass Levels Of Global Financial Crisis“.

One of the more fascinating aspects of shelter as an investment versus shelter as a home that I have discovered, is that people are generally not uncomfortable talking about taking a financial hit, like when a stock tanks or an investment goes awry, but there remains enormous shame around people losing their primary residence.

 Even when realtors are called in to provide an estimate of value the owners rarely share that they’re over-extended or that they spread themselves too thin. They’d sooner admit their relationship was on the rocks than say they can’t meet their mortgage payments. 

Yet that’s what’s happening to many households who had or have closed variable rate mortgages – the 475 basis point increase put many people financially underwater – and currently the people who got the lowest mortgage rates during the pandemic are only now just renewing their 5-year term through this coming year. 

In other words, the people who have been treading water the longest – and who may have extended their amortization period to infinity (banks actually allowed people to extend their amortization period by as much as 90 years so that their mortgage debt was increasing. not decreasing), are now facing their financial reality which, through no fault of their own, is grim.

2 – Homeowners Who Renovated Their Properties Thinking They Couldn’t Lose. 

I don’t fault anyone for believing Canadian real estate values were only going to go up because after 2 decades – beyond government policy interventions – it became easy to fall prey to the false perception that real estate was fail-safe, when in fact it is an investment that ebbs and flows, sometimes significantly, over time.

Furthermore, anyone who enjoyed the never-ending loop of HGTV – which was launched in 1994 – was conditioned to believe that investing their capital in property, particularly cosmetic renovations, succumbed to the notion that it would prop up their investment further, right? Here’s my 2018 post called Behold The HGTV Effect On Toronto Real Estate and my mini rant this year called Dear Urbaneer: When Selling Toronto Real Estate, Is Staging Worth It?

During the pandemic, homeowners become extra motivated to renovate because one of the byproducts of lockdown was that everyone was reminded daily of all the flaws their residences had in real time and, because they couldn’t go out, they had plenty of time to scroll Pinterest. 

Similarly, people were not spending money on travel, eating out or other entertainment, so there was a sense of indulgence, almost in going all-in with home renovations. There was a sense of “If I am stuck here, I better make my home amazing”.

Lenders helped accelerate this by making cheap money available to fund these renovations through Home Equity Lines Of Credit while the real estate stats justified our collective will to spend, because soaring property values suggested “you’d earn it back” effortlessly because there was no reason property values wouldn’t continue to climb.

There were financial implications from all of this, of course.

First, yes, you generally do receive an ROI on renovations, although some projects garner larger sums than others. And second, you generally have to extend these gains over a longer timeline. 

Problems arose on a couple of levels here.

• Interest rates went up. Way up. And stayed there. So homeowners who had large mortgages, and who may have taken out additional debt to cover renovations, were also on the hook for larger debt repayments.
• Meanwhile, housing prices moderated. In some cases a lot, especially when you factor in renovation costs, which left people either underwater, or uncomfortably thin.
• Compound that with soaring renovation prices, & chain supply delays and people inevitably over-leveraged. 

And because the banks are doing everything possible to avoid having homeowners default and hand over their keys, they’re allowing many people to consolidate their debt even when it remains high risk. 

Unfortunately, a percentage of them are being denied so they’re divesting, which is why were are seeing these “renovated, but taking a loss” properties on the market.  Furthermore, the swift decline in Canadian home prices, rising borrowing rates and the skyrocketing cost of living has impacted many relationships. Many homeowners who bought 5 to 8 years ago saw the value of their property increase significantly in a short time period, which prompted many to undertake renovations. However, the supply chain issues and rising costs during the pandemic made renovations complicated, plus the stress of ‘living in lockdown’ with your loved ones was new for everyone and required its own negotiations. Then, managing debt became even more difficult when interest rates started rising in March 2022 and some of the real estate value gains started evaporating. This was a lot of unexpected turmoil that impacted many rosy pictures of domesticity. I would not be surprised to see an uptick in listings for sale and divorce proceedings.

3 – Flippers Who Are Flopping

Along the same lines, flippers who bought fixer-uppers in 2o2o, 2o21 or 2022 when the market was at peak value, anticipating they could continue to ride the wave by turning properties over in quick succession to make a quick buck, often found themselves in trouble. 

As the market began shifting as interest rates increased flippers – along with most everyone else – potentially overpaid for their acquisition. This Toronto Star article explores the plight of flips gone wrong in Toronto over recent years, with many projects going to Power of Sale, or selling at a substantial loss: “An $845,000 Loss, Forced Home Sales: Is The Era Of The Pandemic Home Flipper Coming To An End?”

The Toronto Star article entitled “Power-of-sale Home Listings More Than Double In GTA” is also worth a read, as is this past Urbaneer post: Everything You Need To Know About Property Under Power Of Sale In Toronto.

There are lots of variables in this type of property investment, but when they align it can be modestly profitable. However, I have seen many instances over the years where, had the flipper simply held the house for the same period of time, they would have realized a similar return. To the ire of everyone in the shelter industry, HGTV has always made renovating look quite effortless and profitable (because they never accounting for all the real costs associated with buying, renovating and selling a flip) but it’s always been a risky proposition. Here’s my January 2019 post On Flipping – Or Building Equity – For Toronto Real Estate Buyers that gives more insights on this subject. Recently with the rising costs of materials, labour and higher borrowing costs – and the market retracting to recalibrate at the same time – the floor can fall out of the investment. However, I do want to mention the freehold housing market is faring better than the condo market, and I have seen instances where quality contractors (not to be confused with flippers who do more superficial upgrades with the aim to profit) area still making money (and some who are not).

Regardless, the common wisdom is not to flip – but to buy and hold – because you can weather the variables of a shifting market to generate a positive return when your timeline is a distant horizon.

4 – Fallout From The Chinese Property Crisis (& Anywhere Else For That Matter)

Another factor at play is the relationship between the Chinese real estate market and foreign investors in Canada, as outlined in these stories:

 “We’re Starting To Feel The Global Ripple Effects Of China’s Property Crisis“ and “Vancouver’s High-End Condos Hit By China’s Downturn“. 

The contraction in wealth is both local and global.

China’s massive housing market is in a bubble-burst scenario. For years, money in large sums had been directed into Western real estate markets, as Chinese investors looked to park capital elsewhere and divest abroad, with estimates saying that amounts increased by six times between 2014 and 2019 in markets such as Canada. Part of their motivation has been wealth preservation, but Canada has also been favoured because our higher institutions of learning are well-regarded and it’s a great place to live.

However, because the real estate market in China is also undergoing its own downturn (check out “Understanding China’s Real Estate Crisis“), many Chinese investors are divesting their western real estate assets so that capital can be used to rebalance or shore up their portfolios in China. And given their motivation to liquidate some of their Canadian real estate is on a compressed time period, there has been significant downward pressure on prices in Vancouver and Toronto, in particular. 

5 – Condo Investors Cashing Out Because Of Weak Risky ROI

The one area that we are seeing people selling at a loss is in property investment, particularly in the condominium market. Since the 1990s when all levels of government stopped directly investing in creating housing, both global capital, pension funds and mom & pop property investors have snapped up condos as investments  to meet the demand for rental housing. However, as real estate values soared, the disparity between net income to real carrying costs grew, to the point that according to Better Dwelling, over 4 in 5 (81%) new condos completed in the first half of 2024 were negative cash flow. 

Now, negative carry – whereby the investor covers the monthly shortfall between the actual carrying costs and the insufficient rental income – isn’t a bad thing when your asset is on a solid trajectory up, but it also isn’t a good thing. Back in February 2022 I wrote Turning A Blind Eye To The Real Costs Of Toronto Real Estate Investment Properties because investors had lost sight of the fundamentals.  Furthermore, it was clear interest rates would be going up in March 2022, meaning condo values would likely be going down. Since then investors have seen their asset value decrease substantially, all while they also shore up the monthly shortfall out of pocket.

Unfortunately, because rents are falling and the market is wonky, condos are effectively less profitable and less attractive. A lot of investors are unloading them in large numbers, with the objective of parking their capital in other locations or investment vehicles. Toronto’s shine is gone so a lot of global capital is exiting and won’t be returning in the near future, causing further declines in real estate values. Compounding this is that today’s investors aren’t willing to embrace negative carry when there is so much instability in our real estate market. They want to follow real estate fundamentals which have been ignored for some time. However, for that to happen condo prices – particularly for the ubiquitous studio and 1bed high-density crackerjack boxes that have dominated condo developments for 25 years – are going to have to drop in value even further.

Before that happens, I have already written three Urbaneer posts analyzing specific segments of the condo market this year, where I found in each instance 20% to 33% of the Sellers netted less money than when they originally purchased after accounting for their buying, selling, and renovation costs (if any). And some of the Sellers bought their condos as long ago as 2017! Imagine buying a condo 7 years ago to discover it’s costing you money! The financial losses they incurred ranged from $16,000 to a substantial $425,000.  

• Over A Recent 90 Day Period I Discovered 1 In 4 Sellers Of Downtown Lofts Lost Money  

• For Loft Sellers In MLS District E01 Who Sold This Year, Nearly 1 In 5 Took A Financial Hit  

• 1 In 3 Owners Of Downtown Condos That Sold For Over $1Mil In August Lose Out  

The recent data from BILD shows that this tremendous downward pressure continues to be exerted in the condominium market. Toronto Area New Home Sales Down 55% In November — With Condos Taking The Hardest Hit, and despite rate decreases recently, they have yet to be absorbed into the market.

What is happening in the condominium market right now is something that I have written about on numerous occasions in the past. When you have lots of units of the same size and layout, predominantly investor-held, when market conditions compel this owner group to sell, the impact on the market is significant. And as we know, it’s the dynamics of supply and demand that ultimately set prices in real estate. With a flood of condos available on the market, prices are plummeting. And with many of these units being investor held, as opposed to owner-occupied, their willingness to pull the plug and exit the market isn’t easier in terms of feeling the financial pain, but if it rationally makes sense, they understand selling at a loss is the byproduct of risk, and the higher carrying costs, the reduction in rents, and the market uncertainty providing the impetus to sell.

This downward pressure on prices has been significant in the condo market, and circles back to the growing financialization of housing, walking the fine line between housing as shelter and an opportunity for investment. I wrote about this here: The Growing Trend Of Financial Landlords In Toronto Real Estate.

Incidentally, shortly after posting my Blind Eye post on real estate investment, it prompted me to write When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash because I realized the market was at the precipice of a significant shift. And while a lot of folks think that our real estate market will recover quickly, I suspect we have a lot of ugly to face including a rocky economy, rising unemployment, shrinking incomes, eroding asset values, and austerity measures implemented by a future conservative government which will decimate social safety nets. It may seem eerily similar to the 90s all over again which, as I wrote in Toronto Real Estate Then & Now: The Lost Decade Of The 1990s, was a decade when property values declined for 6 years, and then flatlined for 4 years, before beginning their 20+ year trajectory up. Yup, in the year 2000 people who sold the property they bought at peak property prices in 1989 were selling it 10 years later at a loss after accounting for their buying and selling costs. 

Some common themes here? Employ a prudent, buy-and-hold strategy, examining and anticipating variables as best you can to mitigate risk, both as a buyer- or as a seller. With decades of experience, weathering all sorts of market conditions, I am here to help!

Thank you for your astute question.

If you found this post helpful, these other articles on Urbaneer.com may offer you further insights and guidance:

What’s Trending In Toronto Real Estate?

The Not-So-Unbelievable(?) During A Shifting Toronto Real Estate Market

Dear Urbaneer: Has The Toronto Real Estate Market Gone SLO MO?

It’s A Different Toronto Real Estate Market, Folks!

Dear Urbaneer: A Question About Letters Of Opinion And Estimating Fair Market Value

Over A Recent 90 Day Period, We Discovered 1 In 4 Sellers Of Downtown Toronto Lofts Lost Money

Dear Urbaneer: Which Property Owners Are Selling Their Toronto Real Estate Now In 2023?

Dear Urbaneer: Who Is Buying Toronto Real Estate In 2023?

Interest Rates And The Toronto Real Estate Market

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Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.

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