Homebuyers in Canada show more remorse as housing market cools down and inflation reaches record level

Canada sees a new wave of buyer’s remorse in several red-hot housing markets, as real estate prices started falling and home sales slowed during the previous two months.

According to realtors and lawyers in Toronto and Vancouver, buyers are now looking at what ways they have to get out of a deal and sellers are hoping to close the deal as soon as possible, because conditions have changed significantly from the past record numbers.

Over the last year, Canada saw a 25.7% decline in home sales, while real estate prices were down by 3.8% from March to April, the Canadian Real Estate Association says. In April, the average housing price was $741,517.

Such results have made certain sellers think about lawsuits to make sure transactions are processed and other buyers started worrying about the value of pre-sale homes they purchased years ago but have yet to become owners of.

“With the current housing prices, there’s really no option but to dive in. If you’ve decided to dive in and then understood it was a mistake and there is a way out of it, you will do everything possible to use this option,” – noted Mark Morris, a Toronto real estate lawyer.

Over the recent weeks, he has seen nine cases where buyers wanted to back out of deals. In addition to it, on Monday, he was approached by three sellers eager to use legal ways to keep buyers from walking away.

“Buyers are looking at the existing crisis, and even in the best of times, they believe they overpaid. However, today they have real proof that they’ve done so as markets are beginning to cool down,” – said Morris.

“Many of those buyers have to either seal the deal or just leave.”

People get “afraid” each time the market changes its trajectory and want explore what they can do about deals they have already signed. Nevertheless, according to Phil Soper, CEO of Royal LePage, few of them really walk away, because it’s very difficult to get out of such transactions.

In his opinion, the exception to this pattern appeared in 2020, when the COVID-19 pandemic started and people who wanted to go out of deals had so many unknowns on their side.

Morris believes most buyers trying to abort a deal in 2022 won’t have a success, as there is no legal way to do it. However, he says such cases are not convenient for sellers either.

“Does a seller really want to pursue a buyer that has no assets? Is the seller really ready to waste three years of courts only to find that they have a judgment that can’t be pursued?” – he explains. “Are they ready financially to withstand the courts if they can just resell the property? I don’t think so.”

Although the concern is strong, Soper says the markets are recovering and homes remain a valuable investment.

“Anyone who purchased a home in 2021 in Canada near a market price, will see their home rise in value,” – noted Soper.

“Will it cost more in a year? That’s difficult to foresee, but it will probably cost not less than now.”

Meanwhile, we can see Canada’s inflation reaching a 30-year record high level, increasing pressure on the Bank of Canada to follow the path of aggressive interest rate hikes in the nearest future.

According to Statistics Canada, annual inflation was up to 6.8% in April from February’s 6.7%. This is the highest number since January 1991. Moreover, it exceeds the average forecast of 6.7% reported in a Bloomberg survey of economists.

The report says inflation pressures remain stronger than policymakers had been predicting, making it more urgent for Governor Tiff Macklem to quickly reduce stimulus from an overheating economy. Now, investors expect another 0.50% rate hike from the BoC on June 1.

Markets are sure there will be a half per cent increase next month to 1.5%. The Bank’s key lending rate is expected to reach 3% by the end of 2022. Prime lending rates offered by commercial banks usually exceed the Bank’s overnight rate by a little more than 2%.

There were certain signs of weaker pressure on a monthly basis, even as increases are still historically high. Last month, home prices were up by 0.6%, while the forecast was for 0.5%. March showed a 1.4% gain.

At the same time, the annual inflation of 6.8% may be not the highest result possible, as with the recent gasoline prices hikes, some economists believe the inflation may rise to 7%.