Is the performance of the Canadian real estate market based on fundamentals or speculation? And what about local markets, such as Peterborough real estate?

Before the COVID-19 public health crisis, many financial experts argued that the housing market was in a bubble, consumed by too much speculation in the major urban centres, from the single-detached homes in downtown Toronto to the condominiums in downtown Vancouver. But while the pre-pandemic housing boom was concentrated in only a few pockets of the Canadian real estate market, the COVID-era increase happened nationwide.

Whether in suburban or rural communities, prices are up significantly, leading to an affordability crisis throughout the nation (although recent data suggests they may be starting to cool). Of course, some markets are more overvalued than others, including Peterborough real estate.

This municipality located north of Toronto has witnessed exceptional gains over the last couple of years, as more people enjoyed the freedom to work remotely, allowing households to relocate to cheaper parts of the province, and different provinces entirely. But is Peterborough really the most overvalued market in Canada?

Moody’s Analytics recently published its fourth-quarter assessment of housing price valuations in Canada. Peterborough was at the top of the list of most overvalued housing markets, coming in at 107.8 per cent. The next city on the list was St. Catharines-Niagara, at 106.9 per cent.

This has first-time homebuyers priced out of the market, especially local buyers. The average annual household income in Peterborough is about $70,000, which means they would be approved for a mortgage of roughly $300,000. But since the average home is on par with the national average, too many prospective homebuyers are still stuck waiting to achieve the dream of home ownership.

Study authors note that housing market investors have taken over the Peterborough landscape, doubling in the last couple of years. Housing experts note that real estate investment trusts (REITs) have contributed to the overvaluation of residential properties. Blind bidding, speculation and low interest rates have been the other factors contributing to Peterborough’s ascent.

But can Peterborough continue posting remarkable gains? The April statistics point to the same types of developments as other parts of Canada, from sliding home sales to climbing home prices.

Peterborough Real Estate – The Most Overvalued Housing Market in the Country

The latest data from the Kawarthas Association of REALTORS® Inc. show that residential property sales plunged at an annualized rate of 34.3 per cent in May, with 222 homes sold. In the first four months of 2022, home sales slumped 18 per cent year-over-year, totalling 975 units.

Historically, sales have been down as well, sitting 7.2 per cent below the five-year average, and 17.7 per cent below the decade average for this time of the year.

Prices are the key in the Peterborough real estate market. Association data highlight that the MLS® Home Price Index (HPI) for a single-family home advanced 27.4 per cent year-over-year to $793,800. The average price of homes sold in May 2022 jumped by nearly 19.8 per cent to $836,843.

“Sales activity was down in May from last year’s near-record level, a trend that we’re seeing play out almost everywhere in Southern Ontario,” said Kate Kidd, President of the Peterborough and the Kawarthas Association of REALTORS® Inc. “New listings are beginning to return to the market, which is lifting overall inventories from their historically low levels. However, it’s going to take more than a few months of stronger supply to have any meaningful impact on the market balance in the long term.”

Indeed, the Peterborough housing market saw the new number of residential listings increase by 8.4 per cent in May, to 425 new units. For the month of May, this is 11 per cent above the five-year average but three per cent below the decade average.

Active residential listings rose 44.3 per cent to 339 units. On a historical level, active listings were 18.8 per cent below the five-year average and more than almost 50 per cent below the 10-year average.

Months of inventory were 1.5 at the end of May, up from 0.7 months from the same time a year ago. This is a commonly used measurement since it takes into account the number of months it would take to exhaust current stockpiles at the present rate of sales activity.

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Traditionally, cottage country had been an ecosystem of affordable recreational properties for both middle- and high-income families. Households would purchase a cabin in the woods, or a waterfront home to visit throughout the year and enjoy the sights and sounds of nature and a quieter pace. In the aftermath of the first wave of the coronavirus pandemic, many Canadians transitioned to a work-from-home environment, no longer confined to the office landscape from Monday to Friday, 9 a.m. to 5 p.m., prompting a shift in many Canadian real estate markets. Many people thought this trend would be the new normal on a permanent basis, prompting them to leave big cities and relocate to suburban or rural communities and in many cases, different provinces.

With solid equity levels in their pockets and historically low interest rates, many made the move to small towns and scoop up the lower-priced properties. This became the new trend in cottage country, so many sellers took advantage to sell at a higher price. As a result, nearly every segment of the Canadian real estate market enjoyed a boom, from detached houses to condominiums to cottages.

But while last year’s red-hot housing sector left many prospective homebuyers sitting on the sidelines, there is ostensibly a slowdown forming, presenting homebuyers with an opportunity to get into the market. And yes, this may include cottages.

So, is the cottage market slowing down? If so, why? Let’s explore.

Last Year’s Sizzling Cottage Market is Showing Signs of Slowing Down: Here’s Why

The sizzling Canadian real estate market might be showing signs of cooling off as interest rates begin to accelerate.

The Bank of Canada (BoC) is moving to fight inflation by hiking interest rates. This, of course, could result in a number of scenarios, such as a hard landing for the Canadian economy, a decline in the stock market, or a drop in the housing sector.

Indeed, as the nation’s benchmark interest rate creeps up, fixed- and variable-rate mortgages will respond. Economists argue that this will lead to a decline in sales and prices – just by how much remains to be seen. And recreational properties are already showing signs of decelerating in this rising-rate economy.

Muskoka is a premier cottage hotspot in the Canadian housing market. So, many industry observers look to this small Ontario town to determine the trajectory of the broader cottage market.

According to The Lakelands Association of REALTORS®, residential non-waterfront sales activity tumbled 34 per cent in April from the same time a year ago, totalling 530 units. Waterfront sales also fell nearly 59 per cent year-over-year to 104 units.

“Supply levels are still at historical lows, which means that if we see a continued moderation in sales activity, there is ample room for the market to absorb a welcome increase in available listings,” said Chuck Murney, the President of the Lakelands Association of Realtors, in a statement. “Prices are still trending near all-time highs but have begun to show signs of topping out.”

But experts purport prices are unlikely to return to pre-pandemic levels. Waterfront properties in Muskoka have skyrocketed at an annualized pace of 26.4 per cent to more than $1.2 million. Non-waterfront median prices jumped more than 17 per cent to $750,000.

Suffice it to say, according to housing market analysts, a considerable number of cottage owners are unlikely to list their properties, choosing to hold onto them instead.

That said, there is an issue that might be considered: the return to the office.

Since more companies are reopening their doors and requiring employees to return to the office, people will need to head back to the city unless they wish to restart their daily four-hour commutes. If this is the case, they might need to ditch their beautiful chalets and cabins in favour of an urban dwelling.

Bubble Talk

Is this evidence that the Canadian real estate market was entrenched in a pandemic-induced housing bubble? Before the COVID-19 public health crisis, immense speculation existed that a bubble had been brewing in key cities. Today, this bubble discussion has spread nationwide – including to Cottage Country.

Bubble or no bubble, it may be necessary to rebalance these strong seller’s market conditions. Moreover, when 64 per cent of Ontario’s cottage country, such as Haliburton, South Georgian Bay and the Kawarthas, are considered overvalued, the situation must be rectified.

Wait a minute. Sixty-four per cent? This figure was presented by the Bank of Montreal (BMO) in a new report that assessed sharp over-valuations, although broader trends indicate gains have been diminishing in a broad array of asset classes.

“Froth is coming out of home prices, just as it is across a number of other asset classes that were boosted by excessively stimulative policy,” said BMO Senior Economist Robert Kavcic in a research note. “While a much cooler housing market will weigh on economic growth, we believe that this will be largely an asset-price phenomenon, with underlying fundamentals eventually setting a floor, and the financial system well protected.”

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When purchasing a home, one of the first steps is finding out just how much mortgage you can afford. The mortgage amount is determined on several factors, such as how much debt you carry, what your income level and if you pass the mortgage stress test. Prospective buyers often consult with a number of lenders to find the best mortgage rate available. This is where mortgage brokers come in. There are many benefits of using the services of a mortgage broker, including that the buyer doesn’t receive a bill for this service. So, how do mortgage brokers get paid?

What is a Mortgage Broker?

A mortgage broker is an intermediary who links borrowers to potential lenders to assist the borrowers in obtaining the best possible mortgage terms. One of the main reasons borrowers use mortgage brokers is because the broker will do most of the work during the application process, saving the borrower both time and money.

The Role of a Mortgage Broker

While working to help a client obtain a mortgage, a mortgage broker will gather loan options from various lenders and then present these to the potential borrower. At the same time, the mortgage broker will submit the borrower’s profile to each lender. The broker will need proof of income, assets, employment documentation, a credit report and other documents to secure the best mortgage rate. This gives the lender the information to properly assess how much risk the potential borrower carries, allowing each lender to give their best quote to the broker.

Upon analyzing the borrower’s profile, the broker will determine an appropriate loan amount and submit all the information to each lender for approval. Throughout this process, the mortgage broker is the middleman who communicates with both the lender and the borrower until closing.

Mortgage brokers can be found through the referral of a real estate agent, an online search, or by asking friends and family for a recommendation. When considering a mortgage broker, the borrower needs to play the field and look at all options before settling on a broker, as this relationship is an essential piece in the home-buying process.

How Do Mortgage Brokers Get Paid?

So now that you know what a mortgage broker is and why they are helpful, you probably wonder how they get paid. The first thing to understand is that a mortgage broker is not an employee of a bank or another lender, and therefore, they are not salaried – they work entirely on commission or a finder’s fee. This finder’s fee comes out of the lender’s pocket that the borrower chooses to do business with, costing the borrower nothing.

Mortgage brokers will secure a deal with a lender on the buyer’s behalf, and then the lender will pay the broker a commission for securing the deal. This fee is a one-time payment, although there are times that a broker will receive an additional amount should the borrower renew their mortgage at the end of the term. From the lender’s perspective, this extra payment is for security purposes. Upon renewal time, the broker can persuade the borrower to switch lenders to find a better rate (and obtain another commission). However, by offering a commission at renewal, lenders can reduce the risk of losing the borrower – this also benefits the borrower as they won’t incur any switching costs associated with transferring to a new lender.

In other instances, the mortgage broker may receive a recurring payment after the borrower takes on the mortgage – this is known as a trailer. Essentially, the commission paid upfront to the broker will be less, but the broker will receive a regular, steadier income.

Usually, because mortgage brokers charge the lender, there is no cost to the borrower for their services. However, there are some unique circumstances where there is an upfront fee called a lender fee or application fee, which will either cover part of the broker’s commission or go to the lender for administrative costs.

When working with a mortgage broker, it is essential to shop around for one who fits your profile the best. Often, recommendations from real estate professionals are ideal as they are attuned to the market and the industry and can steer you in the direction of a broker who best suits you and your specific needs.

 

Sources:

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When housing markets begin to cool after record highs, some homebuyers get cold feet. Imagine you buy a home for $1.2 million. When it comes time to close after you have signed your purchase agreement, you notice a comparable home down the street sells for $855,000. What happens when a buyer backs out of a real estate deal?

Some homebuyers choose to walk away when it comes to closing day, despite agreeing to purchase the property. Another common scenario occurs when a homebuyer backs out after overbidding in a hot market and going over budget. Once it comes time to close, the bank completes an appraisal and refuses the entire mortgage amount. The homebuyers need to come up with hundreds of thousands of dollars to close. They walk away because they don’t have the money, despite signing an agreement to purchase.

No matter the scenario, walking away at closing after you sign a purchase agreement can have significant legal and financial consequences.

When you back out of the deal, it will cost you. You instantly forfeit the deposit you submitted with your offer. You are also at risk of being sued by the seller for money they have lost on the sale of their home. Understanding the purchase agreement and adding conditions to protect you from unforeseen circumstances is essential.

Understanding your Agreement of Purchase and Sale

An Agreement of Purchase and Sale is a firm and binding deal that allows the buyer and seller to proceed with the sale. It outlines the terms and conditions of your home purchase. As a legal agreement, backing out comes with serious consequences.

Once the buyer and seller sign a purchase agreement, it becomes legally binding. Typically, the buyer provides a deposit between one and three per cent of the purchase price to show the seller that they will honour their agreement and complete the purchase. Backing out of the deal after signing the contract and paying the deposit means you do not get that money back.

Are there legal ways to back out of a real estate deal?

There are a few legal ways to back out of a deal. The first is if the sale was conditional and the conditions were not met. It could result from a significant issue in the home inspection, a low appraisal, or the inability of the buyer to sell their current home. Regardless of the reason, the deal dies automatically if the conditions are not fulfilled.

Additionally, an agreement could become null and void for reasons outside the contract’s conditions. Common issues that can end a deal are a lien on the home, substantial damage to the property before closing, or if the buyer can prove that the seller knowingly misrepresented the property in a significant way (however, misrepresentation can be hard to prove in court).

The risks of backing out of a deal at closing

Buyer’s remorse is not part of real estate. Once the buyer and seller have signed the purchase agreement and the conditions have been satisfied, both parties must abide by the contract. There is typically not much leeway to cancel a real estate purchase.

Sellers may feel that they overpaid, or their financial circumstances have changed, but those reasons may not justify the potential consequences of walking away.

If the buyer walks away, they may forfeit their deposit and could be sued by the seller for loss in the value of their property on resale.

If the seller eventually sells their home for a lower price, they may sue for the difference in price. Let’s say there was an agreement to purchase the house for $850,000. The closing day comes, and the buyers back out. The home then goes back on the market. The best offer is $700,000. The home buyers that backed out on closing day now must make up the money the sellers lost. In this case, that is $150,000.

This nightmare scenario has played out. In Gamoff v. Hu, the buyers lost their $30,000 deposit, and they were ordered by the Ontario Superior Court of Justice to pay $470,000 in the lost value after they backed out.

You may also be responsible for the seller’s legal fees, mortgage carrying costs, and any other losses the seller suffered.

How to avoid the risks of backing out at closing?

With the help of legal representation, there are a few things that you can do to protect yourself from these circumstances. Consult with your lawyer before signing an Agreement of Purchase and Sale to determine if there are terms to add that will protect you, as the buyer.

Setting the right contingencies within the contract is the best way to protect yourself from some of the most common issues home buyers encounter.

With a low inventory and rising competition for homes across Canada, it may be tempting to waive any conditions, especially when competing against multiple offers. Discuss the situation with your lawyer, consult a financial advisor and consider getting a mortgage pre-approval, to help ensure that you add the right conditions to your Agreement of Purchase and Sale before signing on the dotted line.

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If you’re considering buying a cottage in Canada and have been watching the market, you already know this market segment has seen a surge in competition between buyers over the last decade. In recent years, cabins and cottages have been in high demand, as interest in renting out personal properties for extra income has become more accessible through various online platforms.

While purchasing a cottage as a recreational property or even as a year-round home can be an excellent investment in both the short and long term, there are some important factors to consider during your hunt for the perfect getaway home. Below we break down five important factors to consider when purchasing a recreational property

5 Factors to Consider When Buying a Cottage

Year-Round Maintenance Requirements

Before purchasing your getaway home, it is crucial to have a thorough evaluation to ensure the home is weather-proofed for the summer and winter months. When considering year-round maintenance, key considerations include checking out the age of the roof, doors and windows. You’ll also want to confirm the level of insulation, including under the floors.

Cottage roofs typically undergo a lot of strain in the winter months as snow, ice and other debris accumulate over time. In addition, the age of the doors and windows is important because you don’t want to have any cracks or openings where animals or the elements can enter the cottage. If you aren’t planning on visiting your cottage to complete regular maintenance during the winter, having the roof, doors and windows in good condition can save you money and work come springtime.

In addition to the actual structural requirements, it is essential to familiarize yourself with the local by-laws for winter snow removal. Some regions have rules that state a pathway must always be cleared during the winter months. After reading up on the local by-laws, it might be worth the investment to find someone to check in on your cottage and clear away any snow, ice, or debris in your offseason should you live a far distance away.

Plumbing

Piggybacking on the year-round maintenance requirements is being aware of the type of plumbing the cottage has – or even if it has plumbing at all! When looking at cottages for sale, make a list of important amenities, such as having indoor plumbing. Many cottages don’t have indoor plumbing, equipped only with an outhouse. In addition, many properties in recreational markets run on a septic system which requires a different amount of maintenance, care and attention year-round.

Ease of Access

A cottage can be a great investment; however, location does play a significant role in whether it may generate rental income, as well as the times of year you visit your vacation home. A property that is only accessible by water will probably just be used as a summer home – and in this case, you’ll need to consider the price of purchasing a boat when buying a cottage located on an island.

Some properties in very rural areas may be accessible by car but might not have winter access as many backcountry roads are not maintained in the winter months.

Also, location when it comes to distance from amenities is important to consider. Many cottages are in very rural parts of the country, meaning the drive to a grocery store or gas station could be significant.

Before investing in a secondary residence, ease of access and location regarding other amenities are key factors to consider.

Rental Potential and Rules Surrounding Renting

Cottage homes can be an excellent investment if you also choose to use them to produce rental income. When purchasing a cottage as a rental property, key amenities are the number of bedrooms and bathrooms, ease of access, and location.

Suppose the idea of renting is your main driving force behind buying a recreational property. In that case, it is strongly advised that you review the rules and regulations regarding renting out seasonal property and learn your way around the different web platforms available for renting, such as Airbnb.

Taxes and Capital Gains

A cottage is known as a personal-use property, which means there are different tax implications. If the property is used solely as personal recreational property, there are other tax rules than if you decide to rent out your cottage. In addition, upon sale of the cottage, you will be responsible for paying taxes on any capital gain of the property.

Before making any significant financial decision and purchasing a property, it is essential to consider both your financial situation and your needs and wants in the property. Reaching out to a professional for advice is always a wise first step!

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