Bidding wars and high prices lure home sellers out

Saturday May 06th, 2023


The late-blooming spring real estate market is coming to life in Toronto as sellers become more willing to place a “for sale” sign on the lawn.

Homeowners are finally tuning in to tales of bidding contests and hefty premiums to asking prices.

Many were hesitant to sell when the market was in the doldrums, she says. Listings across many markets were bumping along at a 20-year low in March, according to the Canadian Real Estate Association.

“They haven’t clued in that the buyers are back and sellers remain reluctant.

Heading into May, homeowners are beginning to listen as they hear about multiple offers.

Real estate lawyer Jonathan Griffiths of Griffiths Law says that lack of inventory has helped to buoy prices in recent months.

In the firm’s Whitby office, for example, deals in the $500,000 to $800,000 price range are strong, with some properties fetching 22 or more offers.

Mr. Griffiths believes inventory will continue to swell as more homeowners are squeezed by higher interest rates and distressed sales increase.

“They’ve done remarkably well,” he says of homeowners who have held on so far in the face of rising inflation and rates. “They’re finally cracking.”

Many banks have been working with homeowners to extend amortization periods rather than hike payments, he says.

“In general, the banks are trying to keep a lid on it so nothing cataclysmic happens.”

Heavy debt is taking a toll on some consumers, however, Mr. Griffiths adds.

Some owners with variable rate mortgages are seeing monthly payments jump by 65 per cent, he says.

Stress is even higher for people with second and third mortgages, he says, citing one file which landed on his desk last week. A property with second and third mortgages will now be sold under “power of sale”.

Mr. Griffiths says some who feel that a sale is inevitable would rather list in the near future because they don’t want to be chasing the market down if prices decrease farther.

Consumers who borrowed from private lenders are finding that those lenders are not renewing loans in some cases, he says. Some have borrowed against their houses to buy trucks and keep up appearances with pricey purchases.

“People have used their homes as ATM machines,” Mr. Griffiths says.

Recently a collegue worked with clients who purchased a house for $1.2-million. The sellers had purchased the property in the early 2000s for approximately $300,000.

During that time, they added to their debt as property prices rose.

“They were borrowing against the new value. They had almost no equity by the end.”

Mr. Griffiths is also concerned for homeowners who bought properties in preconstruction several years ago. The federal government introduced an anti-speculation tax in the 2022 budget which has now been passed into law.

People who waited years to take possession of a property must live in it for one year after the closing date in order to be able to claim a principal residence exemption.

Mr. Griffiths says exceptions may be made in certain scenarios such as divorce, an estate sale, or moving for a new job.

Investors who rent out the property during that year and then sell will be taxed on 50 per cent of the capital gain. But buyers who sell within a year of taking possession will have to report the gain as business income, which will be fully taxed.

Mr. Griffiths says buyers who saw their life circumstances change over the course of construction could sometimes argue for an exemption under the old rules but now those loopholes have tightened.

If buyers decide to “assign” the preconstruction contract by selling it to another buyer before taking possession, that transaction will also be subject to the anti-speculation tax.

He points to the example of some of the firm’s clients who purchased townhouses in a project near Lake Ontario in Bowmanville.

Some buyers paid about $500,000 several years ago for properties that are now finished and worth approximately $1-million. Upon closing, the buyers must pay Harmonized Sales Tax of 13 per cent on the gain, or about $65,000, he estimates.

If they take possession and try to sell within one year, their income will be increased by $435,000 and they will be taxed on that amount, Mr. Griffiths points out.

In some cases, investors in the past purchased multiple units in one condo project.

He believes the anti-speculation tax – along with the two-year foreign buyers’ ban – will discourage that kind of investor demand.

“It’s taken out the incentive.”

If domestic and foreign investors are on the sidelines, it’s harder for developers to get to the threshold of around 70 per cent of sales revenue they need in order to line up construction financing. Projects are being delayed or canceled  as a result, he says.

Mr. Griffiths says his law firm might have 25 clients purchasing in one new project in the past but that activity has fallen dramatically.

“It’s just not happening now.”

He believes supply will be hindered in the years to come as a result.

Prices to purchase a preconstruction condo unit in Toronto are currently running at prices up to $2,000 to $2,300 per square foot, and many buyers are reluctant to pay those prices.

“This is why builders are throwing in all kinds of incentives.”

New condo sales fell 74 per cent in the first quarter of 2023 compared with the same period last year, according to Urbanation Inc.

The 2,360 units sold mark the slowest start to a year since the financial crisis of the first quarter of 2009, the research firm adds. The figure is also a sharp correction from the 9,242 sales recorded in the first quarter of 2022.

Urbanation president Shawn Hildebrand says early signs of stabilization for the condo market in the Greater Toronto Area arrived in April with a number of successful preconstruction launches. The resale condo market, which tends to act as a leading indicator for preconstruction condos, also saw stronger activity, he adds.

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