Market volatility reflected in select neighbourhoods’ appraisals

Volatility in Toronto’s real estate market this year has been causing lower-than-expected property appraisals in select parts of the city.

“When sales-to-new listings ratios per neighbourhood fluctuate, it hits some neighbourhoods first,” explained John van Oosterhout, director of partnerships at Value Connect. “Higher-end neighbourhoods are usually affected first, as are neighbourhoods with a high number of investment properties.”

He added that there’s no prediction algorithm, and perhaps the uncertainty makes lenders chary.

“All we can do is look back and say this is what’s been happening and try to bring some sanity to what’s driving it,” said van Oosterhout. “There are lots of reasons lenders won’t approve a deal, price being one reason, but not the only one.”

According to Laura Martin, COO of Matrix Mortgage Global and director of Private Lending Hub, more discernment is required in today’s GTA market. While many brokers have been frustrated by lenders killing deals, but she says there’s a good litmus test to determine whether or not one should keep their fingers crossed.

“A standard term within appraisal reports to use as a rule of thumb for expected value is if the property conforms well with the developments in the general surrounding area,” she said. “What this means is that if the property is in reasonably good condition and is accessible to the demographic—average income, net worth, age—of potential buyers for that area, the value will come in what would generally be expected.”

As of 2016, the two municipalities with the highest concentration of investor activity are Richmond Hill and Newmarket, and they have both witnessed the biggest valuation decline, with declines of 27% and 25%, respectively.

“This could indicate that the areas where there was the most investor speculation were prone to coming back to more reasonable levels,” said Martin. “Oshawa got hit hardest where new builds are concerned. Preconstruction sale prices were sometimes upwards of $1 million, which is high for Oshawa. Current Oshawa MLS stats indicate an average house price of $496,496. “While an Oshawa appraisal for an average priced home will come in as expected, if it’s above or below the standard distribution of value it will show more volatility.”

Martin recounts an anecdote about a client she had last year whose appraisal on his North Oshawa home came in $200,000 lower than he paid for it.

“Of course, even private lenders are only willing to lend on the lesser of the appraised value or the purchase price,” she said. “The client had to come up with additional down payment and get a mortgage at a higher loan-to-value than he originally planned for.”

Neil Sharman