Welcome to my blog on housing, culture, and design! I’m Steve Fudge and I’m celebrating my 31st year as a realtor and property consultant in Toronto, Ontario, Canada.
Welcome to my blog on housing, culture, and design! I’m Steve Fudge and I’m celebrating over three decades as a realtor and property consultant in Toronto, Ontario, Canada.
Today I’m writing about an interesting phenomenon that I witnessed after the Bank of Canada started increasing interest rates in March 2022 and the Toronto real estate market began to shift. If you want a brief overview of the 8 interest rate increases and how that impacted borrowing costs here’s my post –> Rising Interest Rates And The Toronto Real Estate Market.
Not only did the dizzying sums that properties were selling for in the spring stop and begin their decline (with the average sale price for a Toronto house now 20% less than a year ago at the time of writing) but the volume of real estate being traded has also plummeted. In fact, only about half as many properties are selling now as a year ago.
After the March and April interest rate increases, the Bank of Canada was vocal in letting Canadians know bigger escalations were coming. As spring transitioned into summer, many buyers elected to retract from the market – as well as the city in an effort to escape Covid19 – which meant the pool of Buyers was noticeably shrinking. They were also actively hunting for value propositions, ergo highly motivated Sellers.
During the summer many Sellers resisted and held firm, listing and relisting their properties multiple times. Caught in the doldrums of uncertainty, the summer market felt rudderless. Everyone rationally understood that rising interest rates were biting into Buyers’ purchasing power, but everyone questioned to what extent it would translate into price declines. Was the market adjusting or crashing? Was the Bank of Canada’s solution to inflation temporary or enduring?
Essentially, in all the uncertainty confusion reigned. Which was understandable. After all, just a few months earlier the demand for real estate was scorching hot and consumed by FOMO. And while there were many Buyers who still genuinely wanted to purchase a ‘home’, they were nervous that the market was cratering – so they started looking to Sellers to absorb the potentiality of future price declines by offering less. Many Sellers took offense and removed their properties from the market. In some ways, we’re still living with that residual effect. Only half the volume of real estate is being traded compared to a year ago.
This uncertainty, hesitation, and ultimate inaction – by both Buyers or Sellers – suspended the real estate market; a state of limbo blanketed Toronto over the summer months, such that calculating the ‘true value’ of property became impossible. For a period of around 90 days, every property’s value was in a state of flux, its type, size & condition, location, its proximity to the most recent similar sales (of which they were few), the sum lenders were conservatively appraising as mortgage value and the degree of motivation (or desperation) by both the buyer and the seller. In other words, no one – including professionals and players in the shelter industry – could accurately peg the current market value of any property, at best having to opine a substantial ‘range in value’ of 1o to 15 percent – which is a huge variance given the cost of Toronto real estate. During that 90-day period, we counseled our Sellers to wait until the autumn to list when the market has historically been stronger (which, in fact, occurred –> here’s my post called The Seasons To Real Estate), and encouraged our financially secure Buyers to purchase if the right property came to market substantially discounted, because a golden rule of thumb in real estate is to ‘Buy when no one else is buying’.
High Ratio First-Time Buyers
For first-time Buyers who do not have the required 20% down payment required to secure conventional financing, those who qualify can take advantage of the First-Time Home Buyer Incentive offered by the Government of Canada. This program allows Buyers to put a down payment of as little as 5% of the purchase price providing the purchase price does not exceed $999,999 and the Buyer agrees to incur the cost for mortgage loan insurance from CMHC, Genworth, or Canada Guaranty.
If you’re not familiar with the high-ratio buying option for first-time Buyers, here’s a brief synopsis:
- you are considered a first-time home Buyer if, in the four-year period prior, you did not occupy a home that you owned or one that your current spouse or common-law partner owned.
- the property purchase cannot be for a sum over $999,999;
- that the minimum down payment is a sliding scale depending on the purchase price (with the minimum being anywhere from 5% to 7.5%);
- the mortgage insurance premium itself increases based on the loan-to-value ratio, such that the lower the down payment the higher the premium which is currently at most 4% of the sum being borrowed (being $37,000 on a dwelling bought for $999,999 with the minimum $75,000 down payment required).
- Furthermore, the Buyer can either pay the cost of the insurance premium on the day they take title to the property or they can add the premium to the mortgage sum being borrowed and finance it at the same terms and interest rate as the mortgage.
- You can also withdraw as much as $35,000 from your RRSP to use towards the down payment of your property purchase, which is not taxable as long as you repay it within a 15-year period. The payback amount is at least one-fifteenth a year of the amount you withdrew from your RRSP.
The Buyer incurs the hefty cost of mortgage insurance. The insurance is in place to protect the lender should the Buyer default. With insurance, there is lower risk and expense for the lender, so the interest rate to borrow the mortgage funds is less. Right now a high-ratio Buyer would get a 0.30% discount compared to a Buyer arranging conventional financing. This offsets the insurance premium cost significantly.
The Quest For A House Under $999,999 Got Harder & Harder Since 2019
With the $999,999 cap for high-ratio Buyers, finding a suitable home at or under this price point has become increasingly difficult over the past few years. In fact, the price escalations meant the pool of available housing stock got smaller and smaller until escalating interest rates propped a door of opportunity open in 2022.
Imagine it’s January 2021 and you’re a first-time home Buyer in Toronto who has decided to take advantage of the Canadian Government’s First-Time Home Buyer Offer and you’re qualified to spend up to $999,999 on the purchase of a home but not a penny more.
You’ve decided to take the leap and get onto the property ladder because you and your partner are starting a family and interest rates are at a historic low. You decide that even though a 2-bedroom condo is more affordable, because you’re planning on having more than one child, or you’re anticipating one of your parents may live with you in their old age, or because you despise condo common fees, or you need a fenced yard for your pet or a garden for yourself… whatever is of great importance to you and yours, you decide to go to the top end of your budget and buy a freehold dwelling – perhaps even something with a finished basement you can rent out to offset your mortgage costs – as close to the central core as possible. At that moment in time, the average price of a house in Toronto is $945,200.
I can quite candidly tell you, having operated in the Toronto real estate trenches for 31 years, the quest to secure the right property is an arduous journey for every Buyer regardless of their price point. Even my Buyers who have truckloads of money find the Toronto real estate market challenging. First, we have a lot of old housing stock that has been upgraded and renovated in bits and bobs over the decades that are devoid of any style statement. Second, we have a lot of newer polyurethane and glass-wrapped sky cubes that are predictable by virtue of their ubiquitousness. Third, we’re a population mired in conventional housing typologies that we leave unembellished so we don’t call too much attention to ourselves. Meanwhile, more and more Toronto Buyers covet the unique or crave fresh, and hope to buy better than mediocre. Including the wealthy. But nothing is more difficult than the first-time Buyer trying to secure a habitable house as close to the central core as possible who is limited by a price cap of $999,999.
In March 2021, the average house price in Toronto hit $1,020,700. A year later it was $1,376,000. So you can imagine how trying it was for anyone invested in securing shelter for themselves and their family. After all, in Canada purchasing a property is symbolic of being ‘biographically on schedule’ and, much like Maslow’s Hierarchy Of Human Needs, we start building our lives by meeting our basic, physiological needs, such as having safe secure shelter (that we own) from which we expand into love and belonging with our chosen family in our chosen community, as a means to achieve self-actualization.
In a market that has been consistently escalating in value for 25 years – barring intentional government interventions like the Provincial Government’s Fair Housing Plan in 2017 – securing a property for less than its asking price isn’t as common as one might think, especially given bidding wars have been a regular occurrence in Toronto since the early 2000s. In fact, these stats are below but in the City of Toronto’s 35 MLS Districts over 50% of the sales were under $999,999 in 2019; it dropped to 38.5% in 2020, fell further to 20% in 2021 and over the course of 2022 only 6% of sales sold for $999,999 or less!
Furthermore, because high-ratio Buyers – who are purchasing their first property at this price point with a down payment of $75,000 – are prohibited from spending more than $999,999, you can imagine how critical that value threshold becomes.
The moment the purchase price of the dwelling tips to $1,000,000, unless the Buyer is securing secondary financing at a much higher cost, they’re putting $200,000 down and arranging a conventional first mortgage for 8o% of the balance. There is a sizable gap between the sums of $75,000 and $200,000 when it comes to a down payment, and because of this – and the competition pitting Buyers who are limited by this price cap married to the psychology of desire and hyper-competitiveness – in an escalating market one is more likely to see crappy properties being pushed up in value to $999,999 than seeing properties listed over $1,000,000 sell for less. Because of this, finding a centrally-located house (as in the original city of Toronto, not the suburbs) for $999,999 or less that you can move into right away (after picking up the keys from the lawyer) and upgrade over time (not obliged to renovate immediately) is becoming really hard to find. I call these The Unicorns Of Real Estate.
But this started to change in 2022.
A Flurry Of Sales Between $999,000 and $999,999
In 2022, not only did the number of listings selling in this geography shrink compared to previous years, but the number of dwellings that sold for $999,999 became significantly smaller. And yet there were about 2.5 times more sales between 999,000 and 999,999 than the average of the three previous years. Furthermore, in 2021 market conditions became really tight for high-ratio Buyers, which perhaps spurned them to act more quickly in trying to secure something in 2022.
In the graph above:
- In 2019, over 50% of freehold sales in the City of Toronto’s 35 MLS Districts were under $999,999
- In 2020, that dropped to 38.5% of freehold sales
- In 2021, it fell further to 20% over freehold sales
- And in 2022 only 6% of sales sold for $999,999 or less!
As a realtor, when I see a house that is listed for more than $1,000,000 sell for a sum between $999,000 and $999,999 I presume the Buyers are high-ratio purchasers. This isn’t always the case, of course, but given it’s quite rare to see and the price cap for high-ratio Buyers it’s not an inaccurate assumption.
What Do We Know About These High-Ratio Buyers Pushing The Trend In 2022?
Across TRREB’s 35 MLS Districts in Toronto only 24 dwellings sold for sums between $999,000 and $999,999 in 2022 but it was 4 times more than the previous 2 years. I called several of the realtors to discuss whether their clients were high-ratio Buyers but many were unwilling to speak to me citing client confidentiality. I respect that. However, many did share that their Buyers were high-ratio mortgages who directed them to submit offers to Sellers with full disclosure of their circumstances. Their objective was to communicate that their buyers were offering these amounts not because they thought that was what the Sellers’ dwelling was worth, but because that was the top end of their budget because of the cap in place by the First-Time Home Buyer Incentive offered by the Federal Government.
I’m fascinated by this course of events for two reasons. First, there is a widely discussed notion that the buyers with the least amount of money (or affordability limitations) would stay out of the market as long as possible and wait for it to hit rock bottom before buying. We’re discovering that that is perhaps not the case.
Instead, this determined group – after being shut out of their preferred locations because of the significant increases in values that came with the onset of the pandemic – wasted no time locking something down. It wasn’t about timing the market for this Buyer segment; it was about getting into the market when the opportunity finally presented itself. Furthermore, these Buyers would have had pre-approvals at lower rates that had been secured as long as 6 months earlier than their closing dates, so to lose that attractive interest rate in itself could shut out some of these Buyers from purchasing. When you are so invested in buying a home for your family, this might be the motivation you need to take the leap of faith into homeownership.
This is significant in the sense that this kind of opportunity has not presented itself since 2017 when the Ontario government intervened with their Fair Housing Plan that caused a decrease in prices for a year or so, a recent example of how policy has influenced housing prices.
Back then the market reacted, both fundamentally and psychologically, as outlined in this article: Toronto Home Sales Dip 18 Percent Over ‘Psychological’ Effects Of Fair Housing Plan: TREB
In the case of the interest rate hikes that started in March 2020, they may have also acted as a catalyst to motivate the Sellers of the properties that the high-ratio Buyer segment was seeking.
It’s a convergence of opportunity from both the Selling and Buying sides of the equation.
What Do We Know About The Sellers Of These Properties Starting In April 2022?
As this group of Buyers prepared to execute their high-ratio strategy, a segment of Sellers found new motivations to sell.
Again, anecdotally many of the Buyers who secured dwellings for $999,000 to $999,999 were taking advantage of the First-Time Home Buyer Incentive being offered by the Federal Government. So I thought I would take a look at who the Sellers were who accepted sums that were as much as $200,000 less than their asking price at the time they accepted the Offer.
Here’s what I found regarding the 24 sales.
First, 30% of the Sellers never bought their homes. Land titles showed they were transferred to the owner for $0 to $2 (between 1967 and 2002) which typically occurs when a property is inherited
Second, 20% of Sellers purchased their residences in the 1980s and 1990s for sums ranging from $120,000 to $208,000
A further 20% of Sellers bought in the 2000s for amounts between $215,000 to $450,000.
And 25% secured their dwellings in the 2010s for $395,000 to $841,000
One Seller purchased in the 2020s for $1,050,000 and subsequently sold at a loss
- 5 Sales before 2000 sold 4.8 times as much
- 8 Sales from 2000 to 2014 sold for twice as much
- 3 Sales in 2018 – sold for 15 to 33% more
- 1 Sale was at a loss
Many of these properties were owned for decades and saw a substantial price appreciation over that time. This truth, likely combined with timing and motivation, solidified the decision to sell, fortunately for this high-ratio Buyer segment.
Furthermore, it is possible these Sellers were risk averse and – seeing the current shift in the market and reading all the doom and gloom – decided to cash out. In other words, their motivation to facilitate a sale was the opposite but the same as the high ratio Buyer’s motivation to buy as soon as the opportunity presented itself.
Of course, there are multiple reasons for a Seller to sell, beyond price, which may be factored in here as well.
Recently, I wrote about the Endowment Effect, which is the emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value, and how some Sellers who are getting a sum that is higher than what I expected still wish they had got a little more.
However, once a Seller has made the decision to sell (or a Buyer has made the decision to buy), at a certain point their motivation to sell takes a higher order than at what price they get. And I wonder if this may be part of what’s happening here.
My analogy is that if you bought a property for $150,000 and 30 years later someone is willing to give you $999,999 even though you were asking $1,1 mil, might you say ‘Yes’ because the sum is more than you ever thought your house would garner, or might you say yes because you finally have an offer that will allow you to move onto the next chapter of your life when time is of the essence?
Value shifts from money to quality of life and supporting those goals.
Sometimes who the Seller is selling to factors in, especially if the emotional attachment to “home” is profound. Part of the decision-making process is that I could see there being some generosity on the part of the Sellers in accepting the lower sum because of the buyers’ circumstances.
Over the past few years, our Sellers have increasingly asked who the buyers are and whether there is a Buyer who is not offering the highest amount but would be a better fit for the community, the neighbours, the amenities, etc.
I genuinely believe this is the case even when we read stories about sellers being duped, like this article –> How A House Flipper Tugged At Heartstrings To Get Hold Of My Grandmother’s Family Home
More Details Around Mortgage Insurance For High-Ratio Buyers
To dive more deeply into the complexities of the insured vs. conventional mortgage route, we reached out to Joe Sammut of the Mortgage Architects to discuss options for buyers considering a high-ratio mortgage.
• Can a buyer pay any amount of mortgage insurance premium at closing, with the option of adding some or all to mortgage debt (i.e. is it open-ended?).
Technically, yes, but that isn’t what tends to happen (i.e. most people with a smaller downpayment tend to roll the premium into the mortgaged amount). However, depending on the conditions of the mortgage, buyers have the option to pre-pay an amount annually (i.e. 10-20 %)
• What about a buyer who has the 20 percent required downpayment for a conventional mortgage, but wishes to take advantage of a lower rate for an insured mortgage?
Technically, yes, but lenders shy away from insuring conventional mortgages unnecessarily.
• Does the mortgage insurance the buyers arrange last for the entire amortization of the mortgage, even if they move residences? And can they port their mortgage insurance if they switch to another lender?
Once the mortgage is insured, it remains an insured mortgage until such time that the client refinances and turns it into a conventional borrowing product OR the client moves to a new property and is buying with greater than 20% down, therefore making the new mortgage a conventional mortgage.
In short, once an insured mortgage, always an insured mortgage – unless a refinance or a sale into a conventional mortgage happens. The terminology is not porting the mortgage, it would be transferring or switching to another lender for the same mortgage amount, and same amortization, therefore the insurance gets transferred to the new lender. A port is when a client takes their existing mortgage to a new property, and new rules apply under that circumstance.
• If buyers purchase at the top end of the price cap (let’s say $999,999) and they secure a $925,000 mortgage, which is the sum used to calculate their premium, does the amount of mortgage insurance coverage they have decline based on the amortization schedule of the mortgage instrument, meaning that at the end of the 25 years the mortgage should effectively be paid off and therefore the insurance is no longer required or valid?
The premium is calculated as a percentage of the mortgage amount, not the purchase price. Amortization does not impact the premium one way or the other. The explanation would be that the purpose of the insurance regardless of the insurer is to protect the lender against default. Therefore, the insurer will only cover the amount of mortgage that is outstanding and needs to be claimed at the time.
It’s worth re-iterating that insured mortgages are only available on properties under a million. So, if buyers chose to buy up in the coming years, requiring a mortgage that goes above a million, they will be required to have 20 percent down and take out a conventional mortgage.
Over the last year or so, this trendline has gained momentum. That pool of buyers who, taking advantage of both a shift in the market and financing options, recognized that more housing stock that reconciled their wish list was in reach – and have been sliding in under $1M. These buyers jumped at the chance to buy a home of the size that they required (a house vs. a condominium) and that was in their price range, which was (finally!) moving into the $999,000 or less range.
What this demonstrates is that the ebb and flow of a shifting Toronto real estate market can provide opportunities for Buyers and Sellers alike, underscoring the necessity of having a well-thought-out selling or buying strategy that has a far-reaching vision, as is being nimble enough to react to micro market momentum.
Are you seeking a realtor with knowledge, experience, and a steady rational approach to gently guide you through the real estate process? In Toronto, any realtor who has been licensed for 25 years or less has never been in a declining market beyond those created by government intervention. As a realtor celebrating 31 years, during the 1990s when Canada was crushed by high inflation, high unemployment, and high-interest rates (oh, and higher taxes. GST was introduced in 1991), I learned how to competitively stick handle the real estate play without compromising ethics, integrity, or reputation. I cultivated excellence in pricing, processing & negotiation. I excelled in crafting lifestyle marketing and shelter promotions to target a niche market. I worked with several development teams on the concept, sales, and marketing of multiple loft conversions and new condominium developments. And I found my calling is in the service of others, helping households navigate the stress and unknowing of closing one door and opening another for an infinite number of circumstances that are part of the human condition.
Today, I can hold space. I can ground space. And I can deftly usher everyone through the transition of purchase or sale gently, assuredly, and kindly. And I would love to do this for you.
If you enjoyed this blog, you may find these posts helpful and interesting:
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