There are still people out there who don’t believe Canada is about to be hit by a devastating housing crisis, but Riaz Kassam isn’t one of them. For him, the crisis has already arrived.
Last July, he made an $80,000 pre-sale payment on a $1.5-million penthouse condominium in Vancouver’s tony H&H Yaletown building, just a few blocks away from where he lives. Kassam, a 42-year-old computer analyst, who’s married with no kids, expected to move in by the end of 2008. But when he put his current apartment on the market, he didn’t get a single offer. He thought maybe he had priced it a little high, so he knocked a bit off. Still, no offers. He lowered it again, and again, until eventually he was offering his apartment for a full $120,000 less than his initial asking price. That’s when he realized he was in trouble. “We reached the point where we couldn’t drop the price any more,” he says, “or we wouldn’t have enough for the down payment on the new property.”
He was caught between a rock and a hard place. Nobody would buy his condo, and therefore he didn’t have enough money for the down payment on the condo he’d already agreed to buy. “We told them that we can’t complete, we can’t sell our place, and we’d just have to forfeit our $80,000.”
Painful enough, but it was only the beginning. Kassam discovered that even if he had sold his old apartment, his bank “wouldn’t even consider” giving him a $1.5-million mortgage for his new place. Prices in Vancouver had been plummeting, and in just a few months, the assessed value of his new place had fallen to roughly $1.2 million—and his bank wouldn’t issue a mortgage for more than the property was worth. Meanwhile, the condo developer was finding that it couldn’t sell its units either, at least not for anything close to the $1.5 million Kassam had agreed to pay. So it held a “blow-out sale,” offering units for as much as 40 per cent off the original listed price. Kassam’s unit wasn’t one of them, but the sale made it clear that his penthouse was worth even less than $1.2 million. Shortly after Christmas, the developer told him he was liable for the difference. He had signed a pre-sale agreement saying he would buy that condo for $1.5 million, they reminded him, and they reserved the right to pursue him for the drop in that condo’s value. Which means they’re probably not just going to keep his $80,000 deposit. They’re probably going to come after him for more than $300,000.
Kassam thought he’d be settled into his gorgeous new penthouse by now, but instead he’s still at his old place, facing a long and expensive court battle with the Bowra Group, owner of the H&H Yaletown. He’s planning to strike first, with a lawsuit alleging that the developer didn’t deliver his unit on time, but he’s not sure he’s going to win. If he doesn’t, “our nightmare begins,” he says. “It’s going to be devastating if we have a judgment against us.”
Kassam is just one of thousands of people getting buried in the rubble of Vancouver’s collapsing prices; a dream market has turned into a nightmare, faster than anyone thought possible. For over a decade, the real estate industry has pumped out glowing reports, detailing the latest surges in prices and transactions, and predicting nothing but blue skies ahead. The heady combination of a strong economy, urban renewal and low interest rates triggered a stampede into houses and condos. Now the boom is shifting into reverse, and economists are warily backing away from their sunny predictions, and grappling with a question no one has posed for 20 years: how bad is it going to get? It’s becoming increasingly likely that the answer to that question will be “even worse than you imagined.”
The H&H Yaletown has now sent out several warning letters to buyers in retreat. Another developer, the Onni Group, is actively suing at least 20 purchasers of its Aria 2 development in Port Moody for backing out of their pre-sale agreements. Real estate developer Amacon is suing seven purchasers of its Morgan Heights development in Surrey for the same. Condo fire sales are raging—the Onni group has been taking out full-page ads in the local papers trumpeting “Vancouver’s largest real estate liquidation event”—and John White, a Vancouver lawyer representing several retreating buyers, says he now gets about “two or three calls a day” from people who have issues with their contracts.
“No one even came close to realizing the impact of this crisis,” Kassam says. Back when he signed the pre-sale agreement, he was following the news, and “they said the real estate market was slowing down, but they were only predicting maybe a one or two per cent drop in property values—nothing to this extent.” But Kassam has learned that you shouldn’t always believe what you read in the papers and what the economists say on TV. Especially now, because despite the carnage in Vancouver, many economists and real estate groups are still predicting that we’ll have just a little stumble—maybe a drop of three to eight per cent in prices—and then the market will roar back to life by the end of the year. But new data on the plunging housing market suggests that those relatively upbeat assessments are wrong, and Canada could see a 20 per cent drop in average house prices between now and late 2011. If sophisticated investors are correct, it might be close to a decade before we once again see prices as high as they were last summer.