Borrowed money led to a boom in pre-construction sales. It could become a problem

Low pandemic-era interest rates sparked a real estate boom across Canada, including in the pre-construction market, but with an increasing number of homebuyers having trouble closing, one expert explains how a “double whammy” of factors has contributed to the issue.

“If the real estate market picks up, everything’s fine,” Doug Hoyes, an insolvency trustee at Hoyes, Michalos & Associates Inc., told CTV’s Your Morning. “If there’s a shortfall, (the builder) is coming after you.”

In 2020, the Bank of Canada set interest rates to 0.25 per cent in an effort to help out the economy but as rates return to more traditional levels, Hoyes warns, it’s leading to buyers qualifying for lower mortgages in 2024.

“A lot of people put the deposit down with debt,” Hoyes told Anne-Marie Mediwake on Wednesday. “Now they’re having problems coming up with the rest of the money.”

How appraisal rates contribute

Some buyers are also struggling with the appraisal rates for the properties they’ve bought, many of which were an investment or as “speculation,” according to Hoyes, with the assumption that prices would continue to rise.

“They figured a couple of years ago… it’ll be worth a couple hundred thousand more by the time it comes time to close,” Hoyes said. “That’s what’s happened for the last 10 years, right?”

Now many of those people are being hit with by “double whammy” of problems, according to Hoyes, and struggling to qualify for a mortgage based on both on their income or by the current value of the property.

“I think we’re going to see a lot more of this.”

Trouble ahead for the industry?

Hoyes also thinks it is possible some developers could find themselves in the same position as strapped buyers in the coming year.

If interest rates remain elevated, or if the housing market starts to soften and appraisal rates fall, builders may struggle to unload properties that sellers have walked away from.

Hoyes warns that if developers start to take losses, they could come after buyer deposits, which would spark a new cycle of bankruptcies.

“Let’s face it, they also use borrowed money to build these.”