A recovery isn't close, as buyers, sellers and appraisers battle the same valuation gap
Amid the massive slowdown in condo purchase activity in Toronto and Vancouver in recent years, one of the biggest deterrents for hopeful buyers has been a prolonged slide in property values.
That decline is continuing despite an uptick in Toronto condo sales in recent months, meaning plenty of prospective buyers are still sitting on the sidelines – both because they think they might snag a better deal down the line, and as a result of the well-publicized appraisal challenges still at play.
Those problems will be familiar to anyone in the mortgage industry who’s dealt with clients in the condo sector: the buyer and seller agree a price for the property, only for the appraisal to come in much lower than that amount, often leaving the buyer scrambling to make up the difference.
The outlook has been even worse for buyers who signed for a preconstruction condo at the height of the COVID-19-era market boom, only to see prices and valuations plummet in the ensuing years.
That presale pipeline, and the slew of units now closing after being bought several years ago, remains the biggest crisis point in the sector, according to former Appraisal Institute of Canada (AIC) president Terry Dowle (pictured top).
“Sales or engagements for sales that occurred several years ago – two or three years now, four years ago – they’re just starting to come to completion,” Dowle told Canadian Mortgage Professional. “That expectation – ‘I bought my unit at X amount’ – that dollar number’s come right down. So that’s a challenging area in itself. And what that does is it flows into the secondary market.”
Dowle highlighted a distinction that appraisers use to explain the disconnect: value in exchange versus value in use. The former asks what a comparable unit would cost elsewhere, while the latter reflects something specific to one buyer, such as a view that can’t be replicated.
But in a market flooded with newly completed presale inventory, the former is what dictates price, and it isn’t supporting the numbers buyers expected when they signed years ago.
Investor exits and shrinking units
Investor buyers were once a key driver of condo purchase activity in both Toronto and Vancouver, but rising interest rates, appraisal challenges and plunging rental demand torpedoed that trend.
The result: a glut of smaller inventory, built specifically for rental purposes, that makes little sense for an end user to buy and has little to no appeal for renters with a growing variety of options in the current market.
Transactional data has unsurprisingly shrunk amid the market cooldown of recent years, presenting more hurdles for appraisers who suddenly have much fewer transactions to rely on when judging the actual sale value of a property.
Appraisers who once could compile comparables largely from MLS records and title searches are now taking “more of a shotgun approach,” according to Dowle, re-engaging directly with real estate agents and other market participants to confirm sales. That’s a return to practices common decades before online data made the job faster.
Data gap remains a huge problem
The data gap is important in the condo segment because in soft markets, appraisers weigh not just closed sales but current active listings and days on market as a proxy for demand. If a presale price sits above every comparable active listing, Dowle said, there’s little basis to support it.
The bad news for condo market watchers hoping for a swift end to those problems is that Dowle doesn’t see a resolution soon. “I don’t expect there’s going to be any significant changes specifically in the condo market for a while, because there’s no new building going on,” he said. “We could see some issues around affordability if interest rates stay where they are.”
A sustained recovery, according to Dowle, could be more than a year away. Until then, the most important step for mortgage brokers and appraisers alike is to keep the conversation going about a file and what it needs to get over the line. “I think the biggest issue really is the communication,” he said. “The earlier that communication can start to happen – and both ways – the better.”
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