Regulators have made several changes to the mortgage market each year since the 2008 financial crisis. The most recent changes are the most disruptive—to the industry, to clients who seek competitive low rates and to mortgage insurance premiums.
Ironically, the moves have resulted in increased rates and insurance premiums for better-qualified applicants. Yes, you read that correctly, you now pay higher rates and/or higher premiums for being a higher-calibre less-risky borrower. But that’s a separate story for a different day.
While many of Ottawa’s changes have strengthened the overall foundation of the financial system (should any shocks to the system arise), the litany of rules appear to have done little to rein in the price increases in Greater Toronto and Greater Vancouver.
This is by design, they say. The federal government is less concerned about controlling prices (a good thing) in a few specific markets as they are about ensuring the overall stability of the national economy.
We are now entering the third consecutive spring market with subject-free offers and bidding wars. It’s already taking place in the two hottest markets, and even in previously docile markets like Ottawa. It’s also happening in smaller communities as far as 100km away from Toronto and 30km from Vancouver.
Clearly something needs to change to address these valuation spikes.
And so the question of the day, or perhaps the question of the year, is: Why do we continue to allow subject-free offers?
Allowing buyers to write condition-free offers on an aging housing stock is risky on its own. But when people start using this as a tool to compete for homes, it allows them to buy into a pressurized situation and overpay “in the heat of the moment.” That inflated price is then used to justify similar overnight jumps (sometimes 10% or more) in the surrounding area.
Last spring I personally watched units in one particular building increase 20% in the span of 30 days. People felt their offers simply had to match the previous high-water mark set by people who often over-bid.
And then came the multiple sales, all triggered by one pressured buyer that bid far too high. These become “comparables” and, in the case of an appraisal, wind up supporting each other.
Legislating a mandatory cooling-off period can be done
In new construction sales, a mandatory rescission period of seven days exists in most provinces.
In other words, the one property—a new build—that is least likely to have significant issues is the one property you cannot write an offer on without having sufficient time for due diligence (arranging an appraisal, inspection and satisfactory financing).
Regulators have done a wonderful job protecting consumers from unwittingly walking into a new project sales centre and entering into a binding contract without an opportunity for outside consultation.
On the flip side, one could argue that regulators have done an abysmal job of protecting consumers from entering into a binding contract on a 100-year-old home laden with asbestos/vermiculite, plumbed with lead or poly B piping and wired with knob-and-tube or aluminum. These are all potentially show-stopping red flags for mortgage financing.
We often trust and counsel consumers to make smart choices without the pressure of circumstance or cajoling salespeople. Yet, seemingly just as often, we implement regulations to save people from themselves, suggesting they don’t know any better. So which is it?
The Double Standard
Apparently new property buyers are emotional train-wrecks that need protection from themselves via a rescission period. But buyers of used properties are calm, cool and collected market experts with finance degrees and construction experience?
I think most buyers know which category they fall into, especially the first time around. So why is there not equal protection for both groups of buyers?
Regulators need greater policy alignment here. The implementation of a mandatory rescission period for all real estate transactions, new or used, should be welcomed by all parties in the process.
Even sellers who benefit from high-pressure bidding wars and unconditional offers should be open to it. They themselves almost instantly step into the losing side of the equation after they sell, when they try to purchase a property themselves.
The implementation of a mandatory rescission period for all real estate transactions would help defuse a meaningful amount of the frenzy, frenzy that is creating markets that economists increasingly deem unsustainable.