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Toronto home buyers play a waiting game as market stays on a simmer

The Greater Toronto Area real estate market is in a fickle mood this February.

Buyers and sellers are waiting for the market to "show its colours," says Joe Sammut, a mortgage broker at Toronto-based Mortgage Architects.

Some properties sell within hours above the asking price. Others languish without much attention.

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Industry players say consumers have taken the Bank of Canada's January rate hike in stride. They're also unfazed by new rules that make it harder to qualify for an uninsured mortgage.

"I was expecting a lot of people to find these new rules would scare them not only out of the market but out of the discussion," Mr. Sammut says. Instead, his phone has been ringing steadily with calls from potential buyers who want to be ready to pounce.

At the start of the year, there was plenty of confusion surrounding the new measures imposed on some lenders by the Office of the Superintendent of Financial Institutions.

As of Jan. 1, borrowers who apply to a federally regulated lender for an uninsured mortgage must show they can afford payments at interest rates 200 percentage points above their contractual rate or the five-year average posted rate – whichever is higher. By now, consumers have absorbed the changes, Mr. Sammut says.

"They know full well they have to qualify."

Some market watchers have predicted the new rules will suppress demand and therefore lead to sinking real estate values in high-priced cities such as Toronto and Vancouver. A few of Mr. Sammut's callers say they're hoping for the market to drop 10 per cent to 15 per cent – but he cautions they may be waiting in vain.

"How do you know that's going to happen?" he asks. "We might just see a levelling off."

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At Capital Economics, chief North America economist Paul Ashworth says the early evidence from Toronto and Vancouver reveals that the tightening of mortgage-lending standards at the start of the year did hit home sales in January, but the declines were not disastrous.

New listings in the Toronto area, which saw a massive spike in 2017, slumped in January, he notes.

"If sustained at these lower levels, the drop in new listings could provide an important support for home prices this year," Mr. Ashworth says.

But along with that short-term buffer, a bigger squeeze will come from the surge in longer-term interest rates, which are being pushed higher by the global bond sell-off, he says.

Mr. Ashworth says prices in Toronto and Vancouver look too high based on the fundamentals.

For Mr. Sammut, areas far outside of Toronto, such as Orangeville and Collingwood to the north, Hamilton to the west and Prince Edward County to the east, have been "crazy busy," he says. In the 416 area code of central Toronto, buyers are hovering, but transactions in January were down 22 per cent from January of last year because there are not enough listings.

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For a mix of reasons, he expects the overall market to remain fairly subdued in the first quarter and to pick up speed in the second. Some buyers pulled their purchasers forward in order to beat the "stress test," he says. An early Easter Weekend, which starts in late March this year, will also delay some listings, Mr. Sammut adds.

These days most of his clients are opting for a fixed-rate mortgage with a five-year term, Mr. Sammut says. Rates for a five-year currently range from about 3.44 per cent to 3.59 per cent, he says.

The high-ratio mortgage borrowers are more likely to go with a variable rate, he says, because the rates are lower at the moment. The risk is that the variable rate will rise if the Bank of Canada lifts its benchmark rate.

In a notable shift, a few clients are even locking in for a 10-year term, Mr. Sammut says.

"That has not at all been in the discussion for the past 10 years."

In another mortgage twist, rising rates could see the return of buyers taking over an existing mortgage from a seller.

Kenneth Yim of Keller Williams Referred Urban Realty recently listed a one-bedroom-plus-den condo for sale in Toronto's Distillery District. The unit, with an asking price of $599,900, offered a large balcony, floor-to-ceiling windows and the opportunity to take on a mortgage with a rate of 3.19 per cent until April, 2019.

The assumable mortgage was a common enticement when interest rates were climbing in years past. But the practice all but disappeared in recent years because interest rates have been at historic lows for so long.

In this case, a bully placed an offer of $630,000 on the table within a few hours of the unit arriving on the market. The seller accepted and the buyer opted not to assume the mortgage. But the practice can sometimes benefit both parties, Mr. Yim says. The seller would have avoided a penalty of a few thousand dollars for breaking the mortgage. The buyer could pay a slightly lower rate of interest than the fixed rate for a five-year term on offer today.

Mr. Yim says the seller is happy because the unit sold above the asking price in less than 12 hours. But if rates continue to rise, assumable mortgages may be dangled in front of buyers more often, he predicts.

He adds that there's very little inventory in the condo market downtown.

"Everyone's going to wait until spring," he says of sellers who are hoping for higher prices in April and May. He points out that those sellers will face more competition at that time so he's urging people to list sooner if they can.

At his listing in the suburb of Vaughan, however, showings are infrequent. "There's not much traction."

Mr. Sammut says despite some hesitation on the part of buyers, lenders are willing to provide mortgages. The new OSFI rules offer added security because they are forcing lenders to look at their clients through a finer microscope, he says. "It gives room for the rates to rise without fear of default."

Mr. Sammut hasn't heard a lot of talk about the resurgence of the assumed mortgage. Some sellers may find the practice attractive because the fee for breaking an existing mortgage can sometimes be prohibitive. Those conditions are written into the fine print when the borrower signs up.

He also warns that the seller needs to determine what happens if a new buyer assumes the mortgage and then defaults. "They may very well be on the hook for the first term."

As for the buyers assuming the mortgage, they still have to qualify with the lender, Mr. Sammut says. They may get an attractive rate, but they won't get around the stress test.

He recommends that home buyers take the time to delve into the options.

Some lenders offering a very low rate mortgage strip out such privileges as portability and assumability, he says, and buyers should be leery of those "no frills" mortgages.

"Those privileges could very well be important to you down the road," he says. "People don't realize that when they're price shopping."

A "portable" mortgage allows homeowners to move the mortgage with them when they trade up or down. That's an attractive option when rates have risen since they first purchased, he says. "We do that every day."

With changing dynamics in the real estate market, he urges buyers and sellers to keep up with new rules and tactics. "They need to go into this completely 'eyes open' because they can't turn around and blame someone else later."

This large four-bedroom detached house in Toronto that backs onto a ravine sold for $302,000 over the asking price.
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