Some housing investors are taking drastic measures, such as piling on high-interest debt, in the hopes that interest rates will soon be cut and home prices will rebound, according to multiple real estate experts.
"One of these biases that investors sometimes have that lead them to make bad decisions is they tend to be overly optimistic about rates falling quickly and significantly, and the housing market returning to boom times again," John Pasalis, president of Toronto-based brokerage Realosophy, told Yahoo Finance Canada in a phone interview.
Many homeowners who have variable-rate mortgages or who have had to renew recently have gotten sticker shock with their monthly payments, a problem that could be compounded for those that own multiple mortgaged properties.
That's leading some housing investors to take on even more debt to manage the higher payments, including tapping private lenders, which can come with double-digit borrowing rates, to avoid having to sell a property in a down market.
Pasalis says from his on-the-ground perspective, it appears to be a minority of investors in this situation and it's likely more prevalent in the condo market which is more investor-heavy and prone to speculative assignment sales, compared to the single-family home segment.
Cailey Heaps, president and chief executive of The Heaps Estrin Team, says it's not prudent for cash-strapped real estate investors to be taking on more debt.
"I think if someone was in really dire straits holding their portfolio, I'm not sure I would advise a client of mine to go further into debt to wait for a market that might take a little bit of time to come back when we're still seeing decent sales out there," she said.
Home price declines deterring sellers
Both Heaps and Pasalis say many investors are deterred from selling any of their properties because of the rapid plunge in home prices.
"They're looking at what they could have got for the property at the peak," Pasalis said.
"Even if they still made money compared to when they bought, they perceive that as a loss. And this is what keeps them hanging on and taking on debt to pay more debt. It's this feeling that they didn't sell at the peak and they just lost 300 grand."
Canadian Real Estate Association data show the seasonally-adjusted benchmark price of a home fell to $730,600 in December 2022 from a peak of $841,300 in February last year, but that gap varies depending on the region and property type.
Even if the Bank of Canada ultimately cuts interest rates in the near term, most economists agree it's extremely unlikely they will fall to the near-zero levels that underpinned record-breaking home prices during the pandemic.
Heaps says it comes down to pride for some investors.
"They don't want to be wrong," she said, but ultimately, investors need to ask themselves what they're waiting for and take a comprehensive look at their portfolio.
Meanwhile, Pasalis says those struggling to make payments might be best served to sell one or two properties and use the gains to deleverage, especially since many investors are likely in a position where they've owned the property for some time and have built up equity.
"They just don't want to sell because they're hopeful prices will rise, but they're bleeding cash because these numbers don't work when you're paying 5 per cent on your mortgage. The better approach is to probably just deleverage, pay down some debt, and sleep a little bit better at night," he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.