Buying a home can be one of the most significant investments people make in their lives. However, the red-hot market has seen some buyers get caught up in bidding wars, leading them to make hasty decisions and become “house poor”.
To address this issue, the Ontario government has proposed a cooling-off period for new home sales. This comes as part of a slew of proposals the Ontario government has created to address the housing affordability crisis we’ve been seeing across Canada. Some include changing zoning laws to allow more development to reach the 1.5 million new homes by 2031 while others are aimed to help buyers get into the market and their first home.
In this article, we’ll cover the proposal for a cooling-off period and what it means for buyers.
What is a Cooling-Off period?
A cooling-off period is a specific amount of time a purchaser has after signing a contract to pull out with little legal ramifications. Often there is a small penalty to pay, but one that is much less than losing a deposit. In the real estate industry, this additional layer of protection helps buyers avoid high-pressure tactics and make sure that the purchase is right for them. In the last couple years with the red hot market, it was easy to get caught up in a bidding war on a “dream home” and bite off more than you could chew. Some buyers had to walk away from deals and lose down payments worth tens of thousands of dollars putting them in an even worse position than when they started.
Doesn’t Ontario already have this?
In Ontario, there is a 10-day cooling-off period for pre-construction condos but not for pre-construction or new homes. This cooling-off period allows buyers to review often complicated legal documents and seek legal advice after signing a purchase agreement to make sure they aren’t unduly pressured into purchasing a property. The proposed 10-day cooling-off period aims to level the playing field between new home buyers and developers.
British Columbia was the first province to institute a cooling-off period earlier this year.
British Columbia instituted a 3 business day cooling-off period for buyers after they’ve signed a contract to purchase a home. If the buyer decides to cancel, they have to pay a 0.25% cancellation fee, which is much less than losing their entire deposit. Although it received some pushback with critics saying that a reneged deal would force sellers to relist in a potentially cooler market, it’ll take a year or two before we can measure the impact it will have on the real estate market.
What are experts saying?
The Ontario Real Estate Association (OREA) thinks the cooling-off period would make for a better pre-construction buying and selling process. Tim Hudak, OREA CEO, says “A buyer opting out during a cooling-off period for a new build will have minimal impact on the developer,”. Hudak doesn’t support having a cooling-off period on all real estate sales saying that a “resale home represents someone’s life savings, and a buyer pulling out could force a retiree or a young family to relist, costing them time and money.”In response to BC’s cooling-off period, Murtaza Haider, associate professor of real estate management at Toronto Metropolitan University, had said that he’s “not a big fan of these cooling-off periods, because the whole market will be suspended or at least that property will be suspended for three days and that's not a good thing,". He theorizes that the cooling-off period would help those who don’t do their due diligence and will unfairly allow buyers to make offers on multiple properties and accept whichever they like after the fact.
What happens next?
The Ontario government is currently consulting with consumer groups, the public, and the home building sector about the proposed cooling-off period. If it’s approved, a purchaser could decide within a specific timeframe to rescind their purchase agreement on new homes and builders would be required to inform buyers of this cooling-off period. As part of the consultation, the government wants to know if there should be a requirement that buyers of all new homes get legal advice on their purchase agreements.
What else is happening?
In addition to the proposal for a cooling-off period, the Ontario government also announced an expansion of deposit insurance for the First Home Savings Accounts to Ontario credit unions. The First Home Savings Accounts, introduced by the federal government and rolling out across Canadian banks as of April 1, is a tax-free savings account intended to help Canadians save up for their first home. “By expanding coverage under the Deposit Insurance Fund Reserve Fund for First Home Savings Accounts of Ontario’s credit union members, we are providing more ways for people to save for their first home, while providing institutional safeguards for credit unions and caisses populaires,” said Peter Bethlenfalvy, Minister of Finance.