OTTAWA • The sharp reversal in Toronto's home prices has thrown Canada's biggest property market into chaos, with scores of buyers suddenly short of money and desperate to get out of deals that looked good just a few months ago.
Much of that turmoil is not just down to those who bid at the peak and now want to get out of a deal, but also to lenders tightening credit and property appraisers lowering their valuations.
Given how long the housing boom lasted, a retreat was hardly unexpected, but after nearly a decade of bidding wars and swift deals, real estate agents, lawyers, lenders and mortgage brokers are struggling to cope with the new reality.
"The big issue is with financing," said Mr John Pasalis, president of the Realosophy real estate brokerage in Toronto.
The first sign of a problem often comes when the lender sends out an appraiser, who judges the property is worth less than what the buyer offered a month or two earlier. A lower valuation means a smaller loan.
Mr Pasalis gave an example of a buyer who expected a C$1 million (S$1.1 million) loan from the bank, only to have it cut to C$850,000 days before the deal was set to close.
"All of a sudden, you have to come up with an extra C$150,000," Mr Pasalis said. He estimated that up to 5 per cent of deals were at risk now, something unheard of a year ago.
Toronto home prices are down nearly 19 per cent from the April peak and resales were about 40 per cent lower last month than a year earlier, according to Toronto Real Estate Board data.
Property appraisers say that while they are the ones to break the bad news to buyers, it is the lenders that hire them who are getting more conservative. For example, lenders can require that the comparable sales used to help determine the value of the house be limited to a shorter period or smaller geographic area to ensure the appraisal reflects the cooling market, said Mr Dan Brewer, an appraiser and mortgage broker in Toronto's Richmond Hill suburb.
As a mortgage broker, he sees the impact of more risk-averse lenders, he said, with many more calls from buyers who need a second mortgage because the first one no longer covers their bid.
The market rapidly cooled in April after the government tightened rules and Home Capital Group, Canada's biggest non-bank lender, ran into liquidity troubles, spooking other lenders and causing a pullback in mortgage financing.
With buyers short of money and sellers desperate to close deals before home prices drop further, many turn to lawyers. Sellers want to sue those dragging their feet on an agreed purchase while buyers look for a way out of a contract without losing between C$50,000 and C$100,000 in deposits.
Mr Brewer said that most borrowers have now managed to secure second mortgages from alternative lenders, but the higher costs and rising Bank of Canada official rates are bound to hurt the broader market at some point.