COOLING OFF PERIOD FOR BC HOME BUYERS

Will the three-day rescission (“cooling off”) period mandated by the provincial government allow BC homebuyers to cool off like these show dogs? I doubt it, but you be the judge.

During the last twenty years, BC has experienced numerous periods of excessive residential real estate activity, the latest of which was precipitated by the COVID 19 pandemic. CMHC inaccurately predicted near the outset of the pandemic that home prices would fall 9%-18% . About five months later (September 2020), the government mortgage insurer’s chief economist, Bob Dugan announced that CMHC was standing by its original prediction. However, the market took no heed of such predictions and housing prices skyrocketed during the pandemic! (As an aside, this simply reinforces the truism that no one can reliably predict the real estate market).

Over the past few years, I have written several blogs about “no subject” offers in frenzied real estate markets whereby buyers make offers with no due diligence conditions (such as home inspections, title reviews, financing, etc.) Buying a home is inherently a stressful process, but making a subject-free offer on a purchase worth hundreds of thousands or millions of dollars in competition with multiple other buyers who are all doing the same thing, is pure foolishness. The winning bidder will almost certainly overpay. If his mortgage lender doesn’t agree that the price is justified, he may have trouble getting adequate mortgage financing. In addition, the property could have unknown defects which would have been flagged with a home inspection.

In an effort to mitigate this scenario, the BC government has introduced an amendment to the Property Law Act (Bill 12) – which will allow the buyer of a residential property a right of rescission for a prescribed period of time. That period of time is three business days as set out in Order in Council 437.

The amendment to the Property Law Act will come into effect by regulation at the beginning of 2023.

To prevent buyers from making multiple bids on various properties and then simply rescinding all of them, there is a penalty of 0.25% of the purchase price to the buyer for canceling the offer during the cooling-off period. For example, on a property purchased for $1M, that penalty would amount to $2,500. See: Order in Council 436.

Will these changes make any real difference for buyers?

The short answer is probably NO.

Firstly, if the market is in a frenzied state and the buyer rescinds his offer, that leaves him right back at square one (less the 0.25% penalty fee for backing out).

Secondly, contrary to the various news stories which reported on this matter, the proposed legislation does NOT allow the buyer the option to get a home inspection or an appraisal for mortgage purposes during the cooling off period. Unless further changes are made before next year, the amendments to the Property Law Act simply permit the buyer to back out of the purchase within the rescission period. The seller is under no legal obligation to permit a home inspection or appraisal during that period unless that’s a part of the contract.

Thirdly, buyers with savvy realtors have already developed a practical workaround for this situation. For the past two years, motivated buyers have been carrying out all the usual due diligence before making subject-free offers (including conducting a home inspection, title review, mortgage pre-approval, appraisal, review of strata documents, etc.) Admittedly, this is not ideal. It involves a good deal of time and expense with no guarantee that one will have the winning bid. But when the purchase is such a big ticket item, it’s definitely a good strategy.

Fourth, the proposed legislative changes do not address the root cause of the problem, namely too many people chasing too few homes. As BC is a preferred destination for many Canadians as well as those abroad, there has been an imbalance in the supply/demand equation for many years, as net immigration to BC each year has consistently outstripped the supply of new homes. Despite a record-breaking number of new homes being built in BC last year (about 53,000), an estimated 100,000 people moved to BC in 2021.

Even if the government was somehow able to incentivize the building industry to construct enough new homes to meet the demand, ever-increasing housing density creates its own problems like overcrowding, traffic congestion, pollution, and friction between homeowners living in closer and closer proximity to their neighbors (which was certainly exacerbated by the lockdowns during the pandemic). As heretical as it may sound, the Ponzi scheme of high immigration and non-stop home construction to prop up the economy may have to come to a stop (or at least a stall for a while -but that’s a topic for another day).

In November of last year, I wrote a blog on this topic suggesting that tinkering with the purchase/sale process would have little positive effect. Upon seeing the proposed legislation and Orders in Council, my opinion hasn’t changed.