When the Toronto real estate
prices came crashing down in 2008 there were many people who were astounded that
this kind of thing could happen in this day and age. However, there were many
others who were not surprised by the events and had, indeed, been predicting
that this very think would eventually happen.
The loss of the subprime market has been held as one of the leading causes of
the real estate market crash. Sub-prime mortgages were approved at an amazing
rate by all mortgage lenders. Such loans involved using lending practices that
put the lenders in a higher risk category, such as lending more money to
borrowers to buy real estate than they really could afford, offering deals on
the amounts of down payment required and offering loans at lower than standard
interest rates. As a result, many of the major lending institutions found
themselves in a credit crunch with many of the borrowers unable to meet their
payment obligations. Companies were forced to declare bankruptcy putting
millions of people out of work and forcing the lenders to foreclose on the
mortgaged real estate.
The crash of the sub-prime mortgage industry has been the focus of news reports
for the past year in Toronto and elsewhere. While millions of Toronto homeowners
have been affected, no one is quite certain as to the initial cause of this real
estate downturn.
The Toronto real estate industry was a gold mine for investors in the past
number of years. One could purchase a property, make a few renovations and
resell it for a sizable profit. Even those with poor credit ratings could afford
to purchase a home or condo in Toronto. This is because the restrictions on
lending were more relaxed in an effort to entice more buyers into the real
estate market. Lenders were able to make a killing by approving mortgages for
those with bad credit by charging high rates of interest on the loan. The
lenders believed that they would make a profit while the borrower was making the
payments and if the time came when they had to foreclose, they would make an
even larger profit on the resale with real estate prices continually rising.
The source of the funding used by lenders in order to offer these mortgages was
varied. Due to low interest rates offered between banks, lenders were able to
secure funding at a low rate of interest and then charge a higher rate when they
approved mortgages for their customers. The real estate market remained stable
and there was a boom in new real estate construction all over Toronto. Instead
of the normal 20 or 25 year mortgages, consumers were taking out mortgages for
35 and 40 years in order to have manageable payments each month.
Toronto homeowners were taking on massive amounts of debt in order to own their
own home and get out of the cycle of renting. The real estate market was healthy
and everyone expected that it would continue to be a very profitable sector of
the economy. It appears now that in hindsight such expectations were very
unrealistic.
2005 and 2006 were boom years for the real estate sector. Lenders approved
mortgages for virtually anyone that applied making it very lucrative for them
financially. However, the start of problems occurred when the previously low
interest rates offered to lenders started to rise and this had a negative effect
in that their profits started to decrease dramatically in a short period of
time. Low interest rates spur spending whereas high interest rates deter
spending on real estate.
Up until the middle of 2006, there was an unprecedented demand for new housing
and real estate construction. Builders could not keep up with the orders, often
having a wait list of customers waiting for homes to be built. Some real estate
was sold before construction even started. The second half of 2006 saw this
demand for real estate gradually starting to decrease and it was about the same
time that the first increase in loan defaults became apparent in the Toronto
real estate industry.
In 2007, lenders started to encounter difficulty obtaining funding for the
mortgages they wanted to approve for customers. Since there was less money
available, those who wished to become homeowners were finding that the doors
were starting to close on easy financing. Wary investors developed stricter
guidelines for mortgage lenders which led to the lenders tightening their own
lending guidelines.
With rising interest rates on the market, Toronto homeowners who had taken out
adjustable rate mortgages were faced with impossible monthly payments when the
adjustment occurred on their mortgages. They found that they were unable to meet
the unusually high payments required to keep their accounts in good standing and
because of the new regulations, they were unable to refinance for fixed rate
mortgages. More and more homeowners were left with no choice but to default on
the loans and the number of foreclosures reached massive proportions.