Home Buyers Face Financial Ruin

In last week’s Insight Article, I broke down the headline, “Condo owners make big gains, but nearly half aren’t making enough rent to cover costs” with a more bullish perspective and provided real-life examples of my client’s pre-construction deals that are raking in some serious returns. If you missed last week’s Insight Article, you can check it out here: “Money Made In Pre-Construction Condos!”

The Bearish Perspective – This week’s Insight Article will provide the opposite perspective – the bearish analysis of the headline, “They bought their pre-built homes at the market’s peak. Now they face financial ruin.” At the end of the Insight Article, I’ll provide you with the inside scoop on exactly how one particular builder is pricing their new homes for sale.

The bearish headline above is actually comprised of 3 separate articles that were talking about the same underlying story. As with most viral headlines, there is always a human story attached to it. When I read these articles, I also empathize with the buyers as well (as intended by the writer).

Where It All Began – All of this publicity stemmed from the article where Mattamy, a very reputable builder, reduced their prices on the second phase of their Queen’s Commons development in Pickering. One buyer was upset that she paid $60,000 more (Original Purchase price was $955,000) one year ago when the market was strong, compared to the newly released second phase prices during a time when the market for detaches in the 905 is weaker.

Three Buyers, One Fight – The story continues where three buyers of Mattamy’s Oakville Preserve subdivision had challenges closing their detached homes this year. Of the three buyers, two were expecting to sell their current house (at last year’s price) in order to pay for their newly built home. However, the current valuation of the homes they are trying to sell is much lower now since the market has slowed down compared to last year. The third buyer was a newlywed couple who was apparently saving up for their entire lives by living in their parent’s house prior to this pre-construction purchase.

So now, as a result of the market being softer for the 905 freehold homes, these buyers are apparently all in “financial ruin”. I put financial ruin in quotation marks because based on my understanding of the situation, they suffered a loss but it’s not financial ruin. Mattamy’s public relations must be working around the clock right now dealing with such bad publicity; they must hate the Toronto Star writer who has put them through all of this backlash.

Sympathy Poll – Let me preface my analysis by saying that I completely empathize with these buyers. However, there are reasons why I draw the line at empathy and nothing more. As with the example poll illustrated below, it looks like 25,122 people don’t have much sympathy towards these buyers.

Capping the Downside – The biggest difference when buying a personal home and an investment home is that with an investment, your tenants will be paying for the mortgage. On the other hand, with a personal home, you will be paying for the mortgage. So you definitely want to cap the downside when it comes to your personal home because finding a good tenant is easier than significantly increasing your salary.

Turning Tables – For the Mattamy’s Queens Commons home buyer who paid $60,000, or 6.7%, more than the current price of phase 2, it’s unfortunate but at the same time, it is fair. Nobody seems to think about the flip side of the situation when this happens because the media doesn’t write about it.

When you buy pre-construction property and the prices increase (like it has been in the last 8+ years), you’re sitting on massive equity from appreciation before you even own the property. In these scenarios, the builder doesn’t ask the purchaser to increase the original purchase price upon closing to get some of the appreciation back.

Additional Thoughts – For the Queens Commons buyer, I would recommend closing the property and paying the $239/month mortgage payment difference because her property will increase in value as GTA intensifies over the course of the next 5 years.

For the two Oakville buyers who have bought 1.2 – 1.6 million dollar homes but are worried about closing, I find it hard to believe that they are in financial ruin. Yes, they may have to sell their existing property for less than expected. However, unless they bought their existing property last year at the height of the market AND this current pre-construction home concurrently, I suspect the equity in the existing home is massive.

Although the OFSI-B20 rules have made it more difficult to close with a prime lender, they shouldn’t have pushed themselves to the limit where closing with an alternative lender at a slightly higher interest rate would put them in financial ruin. Perhaps they didn’t cap their downside.

The last buyer, the newlywed who saved up by living at their parents’ home are in the best situation. If you don’t need to sell a property to close on this Oakville home, then you’re set. As far as I know, if you were previously pre-approved for your purchase, you are still approved as many banks grandfathered it in for buyers. The only hurdle is if the appraisal comes in lower than expected; nothing crazy to freak out about here though. This feels like a story just thrown in for dramatic effect.

My analysis may sound a little bit harsh by analyzing it from a bearish perspective, but it was part of the exercise.

I truly hope these buyers can figure it out. As a buyer, whether you’re investing or buying for personal use, make sure you cap the downside. Make sure you work with a good mortgage agent or broker who actually knows what they’re doing, making sure that you’re not stretched too thin (P.S., if you need a good mortgage broker, I can pass along some great contacts).

Massive Price Drop for Newly Released Project – As many of these freehold builders are pivoting their prices and secretly trying to keep things under wraps, one particular project in Markham saw a major price drop compared to the prices from their first phase in the Spring of last year. The Abbey Lanes Phase 2 sales event was last weekend and the prices were almost 30% less than what they were when they first launched 8 months ago. Take a look at the price list comparison below.

Crash, But Not Really – A 30% drop in prices is quite significant and is technically considered as a crash. But if all of these homes are still selling, is it really a crash in reality? I’ll leave that up to you for interpretation. What do I think though? This may have been the opportunity that buyers were waiting for. The pent up demand was like a hawk eyeing the supply, snatching it up as soon as the product made itself available. The buyers are definitely still out there.

The Wrap – So that concludes this two-part Insight Article on the bullish vs bearish perspectives on the recent real estate headlines. Every writer has an objective, and I certainly hope that my objective through these Insight Articles has helped you to be more critical in analyzing the headlines. Feel free to reach out to me if you need a second perspective.

Until next time, Happy Real Estating!

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