Early Condo Buyers Get Cold Feet in Toronto

Condo buyers who can no longer afford the mortgages for pre-construction condo deals are contacting brokers to try to get out of these purchase agreements with developers.

These buyers are telling agents they are increasingly concerned that they’ll be unable to close their purchase agreements because of higher interest rates, according to a report in the Toronto Star. Many of them jumped into variable-rate mortgages that they can no longer afford,

Realtors in the Greater Toronto Area (GTA) are noticing a rise in inquiries for assignment sales, a legal transaction in which the original pre-construction condo buyer transfers the rights and obligations of the purchase agreement to another buyer.

Royal LePage’s REC Canada (a full-service real estate sales and consulting brokerage) told the Star it is busy fielding inquiries from concerned buyers wanting to know how to get out of a purchase agreement with the developer.

New condo units in GTA are usually sold before a condo tower is constructed—sometimes several years before. Early last year, when Canada’s housing prices were soaring at the same time Toronto was hit with a wave of immigration, pre-purchasing of the condo pipeline was almost automatic.

Now—in the wake of seven consecutive rate hikes by the Bank of Canada beginning in March 2022 lifted mortgage rates from historic lows of 1.5% to more than 6%.

In addition to buyers who were lulled into taking variable-rate mortgages by BOC assurances that rates would not rise before 2023, some early buyers now are fretting that they can’t meet a bank’s financial stress test to see if they can still afford their mortgage payments and qualify for the loan.

According to mortgage broker Butler Mortgages, it is becoming increasingly difficult for assignment sales to close. Usually, investors will buy a pre-construction property and flip it for a profit before the original sale closes.

Now that condo prices have dropped by nearly $90K on average in the GTA, buyers are being forced to sell at a loss—which may still be more palatable than losing the 20% deposit given to the developer.

Butler told the Star he expects a wave of builders to begin seizing pre-construction deposits from people who can no longer finance the deals and reselling in H2 2023 and in 2024.

Last week, TD’s chief economist said that Canadian home owners now being squeezed by variable-rate mortgages should blame the Bank of Canada for assuring them during the pandemic that rates would not rise before 2023.

In the wake of optimistic projections by Canada’s central bank—made during the pandemic when BOC was trying to project calm and stimulate the economy with ultra-low interest rates—nearly 60% of home buyers grabbed variable-rate mortgages as late as January 2022, compared to 6% at the end of 2019, according to statistics from the Canada Mortgage and Housing Corp.