Yahoo Finance 'Tip of the iceberg': Why the drop in Ontario condo assignment sales isn't done yet
It's typically part of the real estate world that's not seen by your average homebuyer. But the condominium assignment sales segment of the market has been turned on its head this year as interest rates rapidly jumped. And according to one expert, the plunge in assignment sales activity is not done yet.
"When I say it's the tip of the iceberg, it's because I know there's further interest rate hikes coming. And I know that this is now unchartered territory from having to qualify for a mortgage perspective," Simeon Papailias, managing partner at Toronto-based real estate sales and consulting firm REC Canada, told Yahoo Finance Canada in a phone interview.
As historically low interest rates fuelled seemingly ever-climbing home prices, Papailias says, condo preconstruction sales were "on fire", up until March of this year.
"The minute that the interest rate landscape changed, you had literally an entire fringe of the marketplace - the speculator - who had to instantly face the truth of potentially having bought at the height of the market and have to, for the first time in three years, think of interest rates and affordability and carrying a mortgage," he said.
"The only thing the market had seen for three years straight was decreasing mortgages and affordable loans."
Condo assignment sales are different from the regular resale market in that it's typically a transaction where a purchaser buys a unit from a developer and sells the contract to another buyer. Essentially, it's the paperwork trading hands, not the physical unit itself because it's not registered yet.
Assignment sales are also usually not listed on public platforms such as MLS and are conducted privately between agents.
In recent years, part of the big lure of assignment sales for real estate investors has been the fact that they only need to put the deposit down rather than have full mortgage financing activated; the investor doesn't need to worry about closing costs, and a quick profit could potentially be made on the assignment sale since prices, especially in regions like the Greater Toronto Area, were soaring so quickly.
There are various conditions and restrictions to be aware of when looking to do an assignment sale, however. Most developers don't allow assignment sales for certain periods of time and until a certain percentage of units in the building are sold first.
Shrinking buyer pool
For those looking to assign, or sell, their preconstruction units though, the buyer pool has shrunk significantly.
Trend data from BrokerPocket, Canada's largest platform for off-market listings, showed sales of assignment listings have sunk since March.
Eric Skicki, founder and chief executive officer of BrokerPocket, says many investors have opted to hold off on buying preconstruction condo units from developers and assignments as interest rates rise.
"You have people that purchased anywhere from one year ago to two years ago with anticipation to make huge profits. But those profits are shrinking because the prices are trending downwards," he said via phone.
The result, he adds, is people choosing to "ride out" the current sales decline by delaying their assignment sale listing. Others who are opting to list anyway are being met with a dearth of buyers.
To get an idea of just how much the dynamics of the Greater Toronto Area condo market have changed over the past year, data released on Monday by market research firm Urbanation showed new condo sales in the region plummeted 79 per cent, with just 1,748 new condos sold in the third quarter, from 8,320 during the same time last year. Aside from the early months of the pandemic, Urbanation says it was the worst quarter for new condo sales since the financial crisis.
Brendon Cowans, vice-president of sales at Property.ca and who has expertise in the preconstruction condo market, says he's seen some sellers list their assignments for the same price they bought at years ago.
He emphasizes, though, that it's not all "doom and gloom" because not all investors are walking away. While some are running into financial trouble or seeing their anticipated profits evaporate, others are still believers in the real estate market and view the current downturn as a short-lived "blip".
But for those buyers that can't close on their condo purchase, the legal consequences are costly.
Not only would the contract holder likely lose their deposit, the developer could seek damages for items such as legal fees, carrying costs of the property and arguably most importantly, the difference in the sales price, which in some cases could be hundreds of thousands of dollars depending on when the unit was purchased.
"It's not something you want to find yourself in," Cowans said.
Meanwhile, REC Canada's Papailias says while every client's situation is different, he generally takes the view that real estate investors should be patient and "weather the storm" if they can.
"The people that are approaching their occupancy dates right now are the people who are living in absolute volatility because they don't know where things are going, just like nobody else does. Every single month we wake up to a new headline," he said.
"And when people don't know what's happening, they get fearful and they panic and they make decisions such as flooding the market with assignments, not being patient or being able to be patient because of changes to life circumstances."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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