Canada's Condominium Magazine

Home buyers worried about paying too much should get an appraisal: AIC

About 7 per cent of the population plan to buy a home or a property in the next year, and most of them are either a little or a lot concerned about the price they’ll have to pay. Many believe that they will end up paying more than the home is really worth. That fear of paying more than market value has influenced many would-be buyers to put off buying at this time. However, a third of Canadians say they are not concerned about paying an artificially high price for a home. These are some of the findings of an Ipsos Reid poll conducted for the Appraisal Institute of Canada (AIC).

Those buyers who said they are not concerned about paying more than market value for a home must be wealthy, or they live in places other than the country’s hottest housing markets. If you’re a Toronto or Vancouver buyer these days, you may take it as given that much of the housing stock available will be priced according to frequently volatile market conditions, not according to any “intrinsic” value of the home in question. In a sellers’ market, a home is worth what buyers are willing to pay for it.

The Appraisal Institute sensibly recommends that buyers hire a qualified appraiser to “mitigate the risk” of paying an inflated purchase price. While this is good advice generally, it may not make much difference in a sellers’ market like Toronto where bidding wars over detached and semi-detached homes are common.

Why? Because although an appraisal may indeed show that the asking price for a particular home is inflated by some criteria, and this information may be enough to dissuade a particular purchaser from proceeding, it is virtually certain that some other purchaser will pay the asking price, if not more. That in turn will put more “upward pressure” on pricing. The buyer who decided not to buy today will only face higher prices tomorrow. In the case of a home with multiple offers, there probably won’t be time for an appraisal anyway.

It should be remembered that any purchaser who does not have a down payment of 20 per cent of the home’s purchase price will need to buy mortgage insurance. Before Canada Mortgage and Housing Corporation (CMHC) will approve the mortgage, the crown agency will have the property appraised, likely using an Appraisal Institute of Canada professional. A purchaser who makes an offer on a high-priced home with, say, a 10 per cent down payment, may very well be denied a mortgage by CMHC.

 

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