Real Estate and Mortgage

What Makes Property Value Decrease?

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Anyone you ask will tell you what they think makes property value decrease in the real estate market.

In reality, there’s always going to be a buyer. However, you might not get the amount of money you anticipated.

I’ve blogged about what increases the value of a home but not property value decrease.

In today’s blog post, I want to discuss what makes property value decrease.

Property Value Reduction
What Makes Property Value Decrease?

The Raw End Of The Deal

A senior couple was ready to move out of the big city and downsize to a small community where they could rent an apartment.

Unfortunately, they missed the market craze of 2022 by listing their home too late in the game.

Eventually, their house sold, but they lost out on a minimum of $150,000 as buyers panicked as the Bank of Canada increased the interest rates.

Over the past two years in Ontario, we saw a massive increase in house sales, resulting in skewed house prices.

Buyers were taking risks without home inspections, paying hundreds of thousands more than asking or buying site unseen.

Related: Should home buyers do without a home inspection to win the bid on a home?

Property Value Decrease During A Buying Frenzy

What typically is a somewhat stressful house-buying process turned wary for many buyers.

I watched firsthand as a friend lost to bidding wars on homes that needed ridiculous renovations to be livable.

Eventually, he found an overpriced home and sunk $150,000 into renovations and upgrades.

Not only did hoarders previously own the home, but it had pet hair throughout and in the venting system.

There was a distinct odor of burning hair when the furnace was turned on, which would wiggle my nose hairs.

The past two years have skewed house prices tremendously during the massive spike in the seller’s market.

Lots of people out there own more homes than what they can sell them for.

Prices have started decreasing, although mortgage rates are somewhat stable yet unpredictable.

Some people might argue why anyone would want to buy a house during such a buying pandemic.

The only answer I can come up with is that there will always be buyers, no matter what the market determines.

That being said, I wanted to talk about how home buyers that purchased during the craze got the raw end of the deal.

What one would think lowers property value often didn’t come into play, leaving some buyers left with large renovation bills.

In other words, what lowers property value didn’t matter to buyers who wanted to buy any house.

Property Value Determinations

What determines property value is a combined effort of the following five constants in real estate.

Remember that when it’s a buyer’s market, all things are thrown out the window, primarily through bidding wars.

We’ve seen it happen firsthand, so it’s no surprise buyers could end up with a lemon of a house.

Homeowners get a letter from the Municipal Property Assessment Corporation (MPAC) every four years detailing their home’s value.

Although the price is always lower than the market value, it’s an assessment to give homeowners an actual number.

That doesn’t mean that the house should be sold for the MPCA price, as some belief.

Besides MPAC, other factors determine the fair market value of a home when it is put up for sale.

  • Local Market /Neighbourhood
  • Current Interest Rate and state of the economy
  • Condition/Age
  • Upgrades/Updates
  • Property Size and Livable Space
  • Comparable home prices

The leading financial cooperative in North America, Desjardins, released a report on August 28, 2022, stating that house prices in Ontario and Quebec were sinking.

Buyers are waiting on the sidelines, and in some markets where overbidding was rampant, prices are coming back to earth. By the end of next year, prices are expected to tumble 17% in Quebec and 24% in Ontario.

Meanwhile supply shortages, high material costs and rapidly rising interest rates are putting the brakes on new construction and renovation. Look for fewer of these projects in the coming quarters in both provinces.

Read the full pdf – Marketprices will continue to fall in Ontario and Quebec

Related: 5 Small Updates That Might Add Value To Your Home

Local Market/ Neighbourhood

The local market suggests what homes in your neck of the woods are selling for which are comparable.

Almost every real estate agent I’ve had the pleasure to meet would carry previous sale house comparables for their clients.

Again, just because a house sold for $500,000 five months ago doesn’t mean a comparable will sell for a similar or the same.

Market conditions can change in an instant, which we experienced selling the in-law’s property.

The house was a massive bungalow on a huge corner lot with loads of parking in a small Ontario city.

After many bidders and views of the home, it was sold for just over $500,000 at the end of 2021.

Months later, house prices went wild, and we could have sold it for much more if we had hung on just a little bit.

That would have left more money in the bank for a senior who relied heavily on a house sale and her husband’s pension for retirement income.

Renovations and Upgrades

Depending on the home, some factors result in a property value decrease.

For example, when we bought our house in 2009, the price was less than in recent comparables.

Let’s also keep in mind we purchased at the height of the market crash, which flooded us with options.

Decrease Property Value

  • The front yard was not landscaped
  • 15-year-old carpet and linoleum flooring both had cigarette burn marks
  • The roof needed to be redone
  • Mice went rampant in the basement insulation
  • The current homeowner smoked in the house

Using the needed renovations, we reduced the asking price by $5000.

The relator argued that the home was priced to sell at a comparable price; however, upon inspection, we didn’t have the same sentiment.

I can’t say that the house-buying process in Canada is any better than in the UK, but we certainly don’t pay nearly as much in realtor fees.

When I sold my house in the UK before moving to Canada, I paid the realtor a 1% commission.

There were renovations I had to undertake as they threatened to reduce my property value.

Some people might not be as invested as I was because I wanted to sell for the maximum amount.

I spent a few thousand dollars, and I got max value with my dad’s help.

  • New Ikea Kitchen
  • Upgraded refrigerator
  • New tile flooring
  • Updated the bathroom
  • New Central Heating/Water System
  • Triple Glazed Windows
  • Removed wallpaper in the bathroom
  • Fully landscaped property

To put into perspective how market value, interest rates, and overall economy can upset a property value, my old house is worth less than what I sold it for in 2007.

Let that sink in.

Mortgage Interest Rates

At the time of writing, according to wowa.ca, interest rates for a 5-year fixed mortgage were between 4.99% and 6.19% from Meridian.

The current best variable mortgage is at 4.69%, meaning it can go up and down based on market rates.

The tangerine bank also has a competitive fixed interest rate of 5.59% in the middle as of October 27, 2022.

Most home buyers opt for a 5-year fixed mortgage as it’s the safer option knowing what their mortgage payments will be.

The fixed and variable rate mortgage will determine how your rates change over time.

We’ve always gone with the 5-year fixed interest rate, which was 4.1% when we bought our home.

A low mortgage payment helped us pay our mortgage off during those five years.

Factors That Could Result In Property Value Decrease

  • Area the house is located – Different parts of a city or town offer variable home prices based on comparables.
  • No schools or limited schools – self-explanatory
  • Limited amenities – stores, gas station, cleaners, doctors, hospital, grocery, highway
  • High Crime Area – known area for drug use, break, and other crimes
  • Known bad neighbors – wild parties, arrests, domestic disturbances, neighbor spats, etc.
  • Home facing an Intersection, garbage dump or apartment building, transformer boxes, and utility lines on property owned by the city.
  • Curb Appeal – landscaping, driveway
  • Home Maintenence – exterior paint, roof, garage doors, windows
  • Garbage or old vehicles, bikes, and machinery surrounding the home
  • Much-needed interior repairs – bathroom, kitchen, flooring, painting
  • Pool – this is a personal preference, but not everyone wants the responsibility of a collection, although families with kids will pay for a house with a pool. Consider the pool’s state and whether it needs repairs and has been maintained by the current owners.

Related: Can an inground pool increase the value of a home?

inground swimming pool property value
Will a pool decrease property value?

Should you invest emotionally in your property? The answer depends on whether you plan to live in the house forever.

Often when homeowners know that the home is not their forever home, they’ll find cheap renovations or little to no upgrades.

Always be wary of what lurks behind a renovated home and whether permits were pulled.

Some home sellers will complete quick and sometimes shady renovations before their house hits the market.

Related: Should I renovate my home before I sell it?

Overall Thoughts

Whether you are a home buyer or a home seller, knowing what can reduce property value is essential.

Buying that lemon will cost you a fortune but selling a lemon will also lose you lots of money.

Pick your battles and hire the right people to inspect the jobs to ensure they are done right.

Before you sign on the dotted line, get to know the neighborhood to see if it feels like a place you could live.

Sellers get your house’s maximum amount based on current market conditions by getting it ready to sell.

Mr. CBB

Thanks for stopping by to read.

Discussion: What actions you need to take around your home that might decrease property value if you sell today?

Please leave me your comments below.

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