The sharp reversal in Toronto's home prices has thrown Canada's biggest property market into chaos, with scores of buyers suddenly short of money and to bail out of deals that looked doable just a few months ago.
Much of that turmoil is not just down to those who bid at the peak and now wanted to get out of a deal, but also to lenders tightening credit and property appraisers lowering their valuations.
Given how long the housing boom lasted, a retreat was hardly unexpected, but after a nearly decade of bidding wars and swift deals real estate agents, lawyers, lenders and mortgage brokers struggle to cope with the new reality.
The first sign of a problem often comes when the lender sends out an appraiser, who judges the property is worth less than what the buyer offered a month or two earlier. A lower valuation means a smaller loan from the lender.
One commentator gave an example of a buyer who expected a $1-million loan from the bank only to have it cut to $850,000 days before the deal was set to close.
Toronto home prices are down nearly 19% from the April peak and resales were about 40% lower in July than a year earlier, according to the Toronto Real Estate Board data.
Two people with direct knowledge of the matter said that lenders had reduced their average valuation on properties by 12% to 15% since March.
Property appraisers say that while they are the ones to break the bad news to buyers, it is the lenders that hire them who are getting more conservative.
For example, lenders can require that the comparable sales used to help determine the value of the house be limited to a shorter period or smaller geographic area to ensure the appraisal reflects the cooling market.
Mortgage brokers see the impact of more risk-averse lenders, with many more calls from buyers who need a second mortgage because the first one no longer covers their bid.
The market rapidly cooled in April after the government tightened rules and Home Capital Group Inc., Canada's biggest non-bank lender, ran into liquidity troubles, spooking other lenders and causing a pullback in mortgage financing.
With buyers short of money and sellers desperate to close deals before home prices drop further, many turn to lawyers. Sellers want to sue those dragging their feet on an agreed purchase while buyers look for a way out of a contract without losing between $50,000 and $100,000 in deposits.
