As home prices decline steadily in Canada, it’s not just sellers feeling the pressure; the effects of a softening market are rippling through the mortgage industry, keenly felt by those trying to facilitate deals.

One emerging challenge is a heightened focus on home value appraisals. As housing markets lose steam, mortgage lenders don’t want to be left holding the bag based on a home’s previously inflated value. That means up-to-date appraisals -- as recent as a few days -- are in increasingly high demand.

“The one thing I’m seeing across the board, everywhere, is everyone is super picky on appraisals,” says Leah Zlatkin, expert and licensed mortgage broker.

“Appraisals need to be very recent and you have to watch out because you’ll submit an appraisal that was done a month ago, and most lenders won’t even take that anymore because the market -- and prices -- are changing so rapidly.”

READ: Homebuyers Beware: Growing Risk of Appraisal Gaps in Softening Market

Home prices have taken a tumble across Canada, following a rapid uptick in interest rates and mortgage costs. According to the Canadian Real Estate Association, the national average home price dipped by 5% year over year (YoY) in July, marking a second consecutive annual decline. The bulk of the price drops were regionally concentrated in Ontario and BC; in the Greater Toronto Area specifically, last month’s prices rose just 1.2% -- the smallest YoY increase since April 2020.

Zlatkin says that when conditions take a turn into buyers’ market territory that lenders start to ask for the most up-to-date appraisals, adding the last time this trend emerged was during the 2007 - 2008 downturn. Property values decreasing at a swift pace make lenders nervous, she adds, especially when buyers only have 20% down.

“You’re buying a house and if the value of that house is going up between the date you purchased it and the date you closed, then your lender has a lot of security knowing the asset that they are lending against is continuing to grow in value,” she says.

“[But] if the property value decreases substantially over that time, then the lender has agreed to front you an x number of dollars based on an appraisal that is two months old in a market that is shifted down 8%. That puts a lender in a very precarious position and the first and foremost thing that lenders need to do is protect the financers who are backing those mortgages.”

“‘When Was That’ Has Become a Lot More Important”

Toronto realtor and chartered accountant Scott Ingram says that as the market turns, buyers have also become much more conservative regarding neighbourhood comparable sales; long-gone are the days when they’d throw hundreds of thousands over asking into the bidding war ring.

“People are not doing that now, they’re coming more back in line with the comps,” he tells STOREYS. “Today’s comp is different from [before]. It’s important not just to say, ‘Ok, what was the last house sold on this street?’ Now, ‘when was that?’ is a lot more important. ‘Oh, is that a March 1st sale?’ I’d treat that differently than looking at a July 1st sale in determining my comps.”

What this boils down to is an extended workload for appraisers, who are having to turn lender files over with increased speed, but with the same-sized workforce. This has made appraisal professionals a bit of a scarce commodity, says Zlatkin.

“It’s actually very difficult to get appraisers right now. There’s a little bit of a time delay,” she says. "I was speaking with one of my appraisers this morning -- so the head of one of the appraisal companies was just in our office -- and I was talking to them about lead times and lag times for their appraisals and they were telling me that right now they’re trying really, really hard to meet their five- to seven-day SLA [service level agreements].

She adds that in cases where her firm has relationships, the appraisals can sometimes be expedited, but that location is a prevalent factor; a property in the GTA may be appraised faster than one in a rural or suburban locale. Fewer overall comparables, due to less sales volume, also leads to challenges when trying to evaluate properties, she says.

“Because the market is not moving as quickly as we’ve seen in the past, you have to be very cognizant of the fact that this house that sold in that neighbourhood three months ago, the valuation on that property, even if it’s the exact same cookie-cutter house, is probably very different from the valuation that they need to do on your current property,” says Zlatkin.

A Vancouver homebuyer experienced the fallout of slower appraisals firsthand; as reported by the Vancouver Sun, first-time buyer Jacqueline Schaffer was left in a financing lurch when her appraisal -- completed 10 weeks after her purchase -- came in under what she’d offered on the home.

“An appraisal should have been ordered at time of purchase, especially in an environment where it was obvious that prices were beginning to decline and interest rates were going up,” Vancouver real estate agent Steve Saretsky was quoted as saying in the piece.

Industry Professionals Under Pressure to Adapt

The Appraisal Institute of Canada (AIC), the nation’s industry designation-providing organization, says that appraisal professionals have had to adapt quickly to changing conditions as the market evolves through the pandemic and and into its aftermath.

“There is always tension between the available supply of appraisal services and the demand for them, given the real estate market is cyclical,” Paul Hébert, Director of Communications at AIC, wrote in a statement to STOREYS. “Demand is driven by many factors such as: market activity, lending competition, interest rates and available inventory.”

He adds that new candidate members are entering the profession each year, following their required university-based education and designation requirements.

However, “It is a shifting landscape, and all stakeholders are continuously working to adapt."

"The COVID-19 Pandemic continues to bring challenges that require adaptation especially in situations where appraisers cannot personally inspect the interior of a property (due to various factors) and they need to take appropriate precautions (PPE, physical distancing, etc),” he states.

Furthermore, Hébert enforces, AIC-designated appraisers are bound by the industry’s professional standards act to provide real time values of the marketplace, and that “current market forces (inflation, interest rates, decreased sales, decreased values) may be having an impact on additional due diligence by lenders in terms of the verification of the collateral.”