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As interest rates continue their upward trajectory, many mortgage holders may be finding themselves pushed to the edge in terms of their financial tolerance; with the cost of borrowing rising 3% since March, rate pain is being felt by borrowers in a variety of ways.

However, it is especially acute for investors and end users in the pre-construction market, many of whom may have purchased their units years ago, before today’s rate tightening cycle. Some of these buyers may now find themselves unable to qualify for a mortgage at today’s rates, requiring them to offload their units to stem their losses -- known as forced selling.

READ: “We Will Need More Information” Before BoC Can Chill Rate Hike Pace: Tiff Macklem

According to mortgage broker and LowestRates expert Leah Zlatkin, condo owners who have received their pre-construction occupancy without title may be among the most precarious.

“Those who signed up for multiple properties during the pandemic or were pre-approved for a mortgage when at their maximum budget will need to assess whether they still qualify for the purchase they signed up for,” she states.

Other at-risk groups include multi-unit owners, who may have purchased their properties at the market’s COVID peak, those who were pre-approved at a rate that is substantially lower than their current one, or those who were maxing out their pre-approval capacity.

However, the head of market research at the nation’s largest real estate board doesn’t foresee forced selling becoming a prominent issue, given how dedicated Canadians historically are at paying down their mortgages. In a Q&A session following a panel at a recent Housing Supply Summit, Jason Mercer, Chief Market Analyst at the Toronto Regional Real Estate Board, pointed to the fact that defaults remain low among this group.

“I think if you look at past housing market cycles where we’ve seen higher borrowing costs or other shocks in the system, like job losses and what have you, that has resulted in softer market conditions for sure, but if you look at defaults, even over recessionary periods, in Canada, and certainly throughout Ontario, they remain remarkably low, in comparison to other jurisdictions like south of the border, and parts, of western Europe as well,” he stated.

“I think it speaks to the fact that, number one, the average Canadian household isn’t given enough credit, in terms of managing their household balance sheet, and number two, Canadians in general are loathe to default on their mortgage versus other obligations.”

However, there are clear signs of softening in the segment. 

The August data from the Building Industry and Land Development Association (BILD) found that while benchmark prices for new condos increased that month by 11.2%, new condo sales remained 61% below the 10-year average and 83% below sales recorded in August 2021

“New home buyers and builders have taken a step back in the face of rising interest rates and inflation,” stated Dave Wilkes, BILD President, and CEO, in the report.

“A useful parallel is the year 2017, when the introduction of the mortgage stress test resulted in artificially elevated interest rates. As sales of new homes slowed, so did construction, ultimately exacerbating our region’s housing challenge. The lesson is clear: now is not the time to take our foot off the gas as we strive to address the factors that contribute to our region’s housing supply and affordability challenges.”

Another way today’s steep interest rates are being felt is in the assignment sale market, where condo purchasers buy a unit at the pre-construction stage, and then sell that contract prior to the unit’s close. This allows investors to purchase units early and ride the resulting market appreciation over time as construction completes, and then sell to another investor or end user at the higher current market price.

However, as many investors take out variable mortgages, carrying a property on assignment is getting pricier to do. 

“The investors have almost disappeared -- they’re in hiding,” Nasma Ali, Broker and Founder at One Group Real Estate, tells STOREYS. Uncertainty in the economy and worries of an impending recession are certainly factors, she says, but the biggest is how much more it costs to carry a property today.

“It’s the real estate market itself, where there’s a price decline and there’s still rate increases. Keep in mind, a lot of investors, they go variable when they buy an investment property. They don’t want to do a five-year fixed. And so right now, variable is a killer because it’s just going to keep climbing, and they have no idea when it’s going to stop,” she adds.

“This is how they think of it: ‘I bought this expensive unit, I don’t want it. What do I want to lose today? Do I want to lose $50,000? Or do I want to risk losing $100- $150,000 later because the value is going down?’ That’s what they’re thinking, when they’re willing to take a hit on their pre-cons. It’s like a sinking ship, they just want to get out.”

However, as Zlatkin points out, there are solutions for those currently holding a pre-construction property; working with a mortgage broker to expand their options is the first rule of thumb.

“If it’s their only property and if they are close to or at their max but have already paid down the required 20%, they will be in a better position,” she says. “If you are on the verge of qualifying, we can find a lender for you. If you are stretched to your max, it might be wise to continue renting if they are currently doing so and find a tenant to rent out the unit. This allows the buyer some leverage to be afforded rental income.”