Welcome to this month’s installment of Dear Urbaneer. I take time every month to sift through our virtual mailbag to answer real estate questions from our readers. In this month’s installment, one of our clients is wondering about the accelerating trend of bidding wars and rising prices during the COVID-19 pandemic.
I keep hearing in the news about how robust the real estate market is, especially in Toronto, to the point where bidding wars are common and house prices are skyrocketing. Wow! Why is this happening during a pandemic? It seems like the opposite should be occurring. Why is that?
Bullied By Pandemic Bidding Wars
Yours is a great question. And I agree that a skyrocketing real estate market seems counterintuitive during a pandemic. COVID-19 has affected our lives and our lifestyles in such profound ways. There most definitely has been a significant impact on real estate – from the way in which we view and use our built environments to driving market trends. In fact, the pandemic has had such a substantial (and ongoing) impact on real estate, that I created an ongoing series on the subject. Have you checked out my posts on COVID-19 and Toronto Real Estate?
Certainly, from my view in the real estate trenches, I have been witnessing more and more bidding wars emerge, with prices escalating rapidly. However, bidding wars are nothing new in Toronto and have been a regular occurrence for near two decades in the freehold housing market which has long suffered from an imbalance between its limited supply and exploding demand. But within the context of a pandemic, this carries a slightly different storyline.
I’ve written about bidding wars a number of times over the years, reflecting the mechanics of the market, the seasons of real estate, and the ongoing lack of housing for an exploding urban population. Check out these past blogs of mine: Getting On The Bidding War Bandwagon, The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate (Plus Cats!) – plus – About Holdbacks On Offers, Bully Offers & Bidding Wars For Buyers – and – For Sellers.
The State Of Toronto Real Estate & The Prevalence Of Bidding Wars
According to this CBC article, “Canadian Home Sales, Prices Hit New Highs For January Compared To Last Year“, the average home price is up almost a staggering 23 percent in January, year-over-year according to CREA. For the Toronto GTA in January, home sales shot up 50 percent year-over-year. The rate of sales continues to outpace new listings, and with tightening market conditions the average price of a home in Toronto is up by 15.5 percent compared to last January.
Rising housing prices and the prevalence of bidding wars have been grabbing all kinds of headlines lately, underscoring the momentum of the movement. This article from the Globe and Mail, entitled, “Toronto Area Real Estate Is ‘Back To Full-On Madness” discusses how bidding wars are running rampant in bedroom communities around the city. Whereas bidding wars were once limited to select sought-after properties, now they have become commonplace for even the most modest homes. As this article expresses, there is concern around the ability to sustain such a swift price escalation that sees people paying substantial premiums for houses that sold for substantially less a short period of time ago. The consensus in the shelter industry is that the combination of extremely low-interest rates and a large pool of affluent qualified cash-rich professionals (many who are climbing the property ladder by extracting their substantial equity gains from the sale of their existing property) willing to compete for the limited supply of housing product.
So, what is it about COVID-19 and living through a pandemic that has created such momentum in the market to fuel bidding wars and precedent-setting prices? This trend is attributable largely to the following four factors:
*Photo courtesy of Kens5
The K-Shaped Recovering Economy
One phenomenon that we are witnessing is a “K” shaped recovery as the economy moves through (and eventually out of) the pandemic. A K-shaped economy, simply, is when one part of the economy recovers strongly, projecting upwards, while other parts of the economy flatline or continues to decline, thus creating a K-shape.
It reveals, among other things large economic inequality, driven mostly by income and wealth differences. You don’t typically see a K-shaped recovery after an economic downturn, because most sectors are impacted, at least somewhat equally. The thinking is that, when a K-shaped economy emerges, it is the result of inequities that inherently exist within an economy, and that the downturn exacerbates the differences. In the case of the Covid-19 pandemic, no one could have imagined that the mitigating factors that impacted your livelihood would be whether:
A) you worked in a non-essential occupation that requires people to be physically present with others in the same space (in a restaurant, store, airplane, social venues, etc) and;
B) that said occupation could not easily pivot into providing a similar experience using technology (like zoom). I mean, how crazy is that?
While the above is a simplified reality of what’s happened, there is no diminishing the way in which COVID-19 has impacted our lives and the challenges and stress that have come along with navigating these troubling times, from an economic standpoint, those employed in sectors that permitted one to work-from-home easily employed and could maintain operations during the pandemic did not suffer as major a disruption as other segments. Income generally continued to flow – and in fact – savings grew under lockdown conditions because people were not using their disposable income on travel & tourism, the arts, sports & entertainment, hospitality, and $5 take-out coffees. And given that around one-third of Canadians (by and large the educated professional classes who can afford to own real estate) shifted to Work From Home and schools were closed, expenses for childcare and commuting were temporarily eliminated, increasing their cash flow.
This article from the CBC, “Where The Lopsided Economic Impact Of COVID-19 In Canada Goes From Here“, indicates that since the pandemic arrived in March 2020, Canadians have amassed $170 billion in savings. This report from CIBC’s Benjamin Tal called “Excess Cash” dives more deeply into the phenomenon of surplus or saved wealth and what effect that might have on a recovering market.
On the other hand, folks working in lower-wage jobs like retail, restaurants, and tourism, along with those in the arts and gig economies, in large part have either lost their jobs entirely or seen their income scaled back repeatedly, as lockdowns roll in and out.
This Huffington Post article “Canadian Economy’s ‘K-Shaped Recovery’: Lower Earners Face Insolvency While Homeowners’ Wealth Soars” refers to a Royal Lepage study that showed, despite the most substantial economic decline since the Great Depression, average home prices shot swiftly in the other direction, with the average home price in Canada rising 8.6 percent in 2020. This article also shows that Canada has the fastest-growing housing prices in any G7 country.
That extra cash for the higher wage earners has largely been directed to the housing market, creating deep pockets for home buyers, which in turn is jacking prices up substantially in numerous markets across the country. This has resulted in an influx of buyers capable and willing to pay top dollar, who were not looking to buy a home prior to COVID-19. This “urban exodus” saw many households sell their smaller downtown houses in favour of larger detached homes in the outer suburbs, exurbs or beyond (including relocating to other provinces).
On the flip side though, as the wealthy grow wealthier, lower-income earners are becoming more indebted, just to get by. In a city like Toronto where affordability has long been an issue, the size of this chasm will only become more problematic in the future, compounded by the fact our archaic zoning bylaws already limit the creation of housing for the Missing Middle which I explore in Toronto Real Estate, Yellowbelt Zoning & The Missing Middle: Part One – and – Part Two.
A report referred to in this article, “K-shaped Recovery And A City Exodus: The Outlook For 2021” reflects the same sentiments.
And of course, when more buyers arrive in the market at the same time, bidding wars ensue. FOMO – the fear of missing out – has always played a role in driving bidding wars, but COVID-19 has presented a bit of a twist on this concept, according to RBC economist Robert Hogue. Many big-city buyers – liberated from the shackles of having to commute daily to work – are extracting their equity with the sale of their expensive urban dwellings to secure substantially larger executive residences in the outlying regions surrounding the city. Given the freedom that has accompanied this recent Work From Home movement, properties that once may have sat on the market for months awaiting their niche target market are getting snapped up by a sudden tsunami of Buyers who never anticipated being part of a booming exodus from urban areas a year ago. This sudden swell of a freshly created market pursuing a limited supply of properties has resulted in big price jumps. And what’s bittersweet for those who don’t own property in any of these impacted areas, is that housing values now reflect the purchasing power of this recent influx of urban professionals, rather than the financial thresholds and affordability of their existing local markets.
According to Stats Can, with data referred to in a Better Dwelling article, entitled, “Ontario’s Most Popular Real Estate Market Is Now Rural, While People Flee Toronto“, people migrating from Toronto to other areas of Ontario went up substantially in 2020. The most popular places were within a 2-hour drive to Toronto.
The New Space Race
COVID-19 has prompted a rapid shift in how we use our homes, including both the necessity and desire for more space – both inside and out – to work/play/learn/live, in most cases, full-time, 24-7.
This has prompted many first-time buyers and existing homeowners to reframe their wishes, wants, and needs, and seek properties that have enough space for their Work From Home offices (frequently two+), more square footage for their laughing barking brood (including a quiet space for online learning), accommodations for their multi-generational families (With COVID-19 Outbreaks In Long-Term Care Facilities, Is Multi-Generational Housing Better?), and larger multi-purpose dedicated ‘zones’ to meet the expanded activities that accompany multiple occupants spending more time on site (The Movement To Hipsteading During The Covid-19 Pandemic & Toronto Real Estate).
This isn’t limited to interior living space either, with demand exploding for family compounds that feature swimming pools, workshops, and recreational outbuildings, play zones, and victory gardens (and not limited to houses, either as I wrote about in The Increased Desire For Outdoor Space In Toronto Condos During The Covid-19 Pandemic). The quest for more (or more intelligent) space became coveted and pursued across the board collectively shortly after the pandemic lockdown was implemented, regardless of the size and type of existing dwelling you were occupying. Singles living in a studio condo needed space for a home office, a couple living in a 2-bed condo needed more space for two home offices, a nuclear family living in a 3bed semi needed quiet zones to four heads to focus, and so on, which prompted anyone who could afford to climb the property ladder to explore it, fueling the Toronto (and Canadian) housing market, with the exception of small Toronto condos double impacted by new Airbnb restrictions implemented by the City and a decline in demand due to closed borders – particularly in high-rise high-density areas – which I wrote about in An Overview Of The 2020 Toronto Condo Market And What Lies Ahead: Part One – and – Part Two.
While the Work-From-Home movement has untethered many, causing the exodus to outlying and rural areas, for those staying in the city there’s been a huge focus on upgrading to whatever version of the “Forever Home” each Buyer envisions according to their budget and ‘New Space Race’ boxes. And for those seeking the ultimate Forever Homes – you know, the large detached 2 and 3 storey merchant class dwellings in the original City of Toronto which have long been in relatively short supply compared to the exponentially expanding affluent educated professional Buyer pool, has ensured this housing type is being fervently pursued with bully offers and bidding wars. I wrote about this early on in the pandemic in my piece called Demand For ‘Forever Homes’ In Toronto’s Downtown Family Neighbourhoods Persists Despite COVID-19 that shares all the considerations – and there are many – that parents reconcile in securing a family home to occupy for the next 2 or 3 decades.
This affluent market segment is comfortable paying top dollar. Firstly, they are able to do so as their incomes and jobs have been relatively stable during the pandemic. Secondly, this shift in lifestyle has also shifted priorities, which have easily justified making a more substantial purchase to resolve their space limitations.
And this has taken root in the market, resulting in escalating prices. This REM article, “Luxury Home Sales Over $3-Mil Set New Record In GTA“, refers to a report that showed that sales of homes over $3 million set a record last year, up a whopping 55.7 percent from 2019. Sales of homes over $4 million went up just over 53 percent, while sales of homes over $5 million went up by 44 percent.
Lower Interest Rates
Another contributing factor to the prevalent now constant bidding wars is the decline in interest rates, effectively putting more money into people’s pockets, and enabling them to finance larger property purchases.
To consider this influence, we requested the insight of mortgage broker, Jake Abramowicz (now The Mortgage Jake Team).
Jake said, “One year ago, in February 2020, interest rates were approximately 2.49% for a 5-year fixed-rate mortgage. At the time, a $100,000 mortgage would cost $447 per month and over the course of 5 years, 57% of your payment would go towards the principal. Today, an average 5-year fixed-rate mortgage is approximately 1.69%. The monthly payment is now $408 per $100,000, and, even more important, 68% of that is apportioned to the principal.”
“This means the previous $447/per month one would pay a year ago now covers an additional 9k in debt. This, to me, is definitely a large part of the reason we are seeing a huge surge in our real estate market, even though a 2.49% rate in 2020 was already an incredibly low number,” he explained.
He continued, “I do not expect these rates to last throughout the year. I do think that by summer or later, we’ll start seeing an uptick and get back to high 1%s or low 2% levels. Keep in mind these are fixed rates, not variable rates. I don’t expect variable rates to go up anytime soon; not until approximately 2022 end of or 2023.”
“Of course, this is all dependent on there not being a third wave, and/or a catastrophic issue with immunization, and some kind of economic disaster,” Jake concluded.
The presence of low-interest rates has been a factor in fuelling Toronto real estate prices for some time. While low-interest rates do play a key role in supporting economic recovery, they also provide the tools for homebuyers to pay high prices, increasing the propensity for bidding wars and the ongoing eroding of affordability.
The List Low Holdback Mindset
What may have been in the past considered a strategy is now so common in the current market, that it really has become a mindset as opposed to a strategy. I’m talking here, of course, about properties that come to market with exceptionally low list prices intended to attract the interest of multiple buyers and fuel a bidding war.
In these posts, I talk about bidding war strategies for Buyers and for Sellers. When a Buyer sees an asking price that is seemingly well below what the market would currently dictate for a property, there is likely a holdback strategy in play. The Sellers set a low price – and by this I mean they take the guidance of their realtor and come to market at an asking price which instantly is understood to be “Too Good To Be True” – and stipulate clearly that they either won’t receive offers before a set date or that they’re willing to consider pre-emptive bids. If the Sellers are willing to consider a pre-emptive offer, you can be near certain Buyers, keen to secure a property, will submit a bully offer pre-emptively for a sum substantially higher than the list price in order to convince the Sellers to accept, in the hopes of bypassing blindly competing in a bidding war. And why not? The Buyer has nothing to lose and everything to gain if only more information rather than the property (like whether the Sellers are willing to accept your top dollar, or whether their expectations are bigger than your budget).
In the Buyer post above, I talk about the psychological impact of a holdback strategy. Today’s Buyers, through experience and awareness of the market, are becoming savvier and savvier around bidding wars. Armed with this knowledge, and perhaps slightly desensitized to the emotional rigours of a bidding war, Buyers are recognizing that engaging in one may be the only means to an end. And what’s more, they now anticipate encountering this strategy during their dwell hunt from the get-go.
This mindset shift means that more people are willing to engage in bidding wars – which like FOMO – inherently drives prices upwards. In fact, Buyers submitting bully offers today are frequently finding themselves in bidding wars against other Buyers also pursuing properties pre-emptively. Yup, it’s that intense. This article, entitled, “Toronto’s Housing Market So Hot Even The Bully Bidders Are At War“, documents how listings, along with demand, rose significantly in January, such that the precipitous price drops in the condominium market during the summer and autumn of last year appear to have now bottomed out, given more Buyers believe now is the time to buy. I have personally seen renewed interest in this market segment, with most of my Buyers focusing on suites in smaller boutique buildings, units having outdoor space, and situated on lower floors closer to ground level so they can use the stairwell, should they choose.
From a Seller’s perspective, there are many benefits to employing a list low strategy which I favour including ensuring a timely sale (usually completed within a week of coming to market), a greater likelihood of receiving bonafide offers that have no conditions, and are accompanied by a sizable bank draft making them immediately firm and binding contracts, greater control over securing their preferred closing date, and a strategy that – when done right – consistently ensures a Seller’s property fetches top dollar (or beyond).
Another benefit for the Seller in a list low holdback scenario is that they are effectively removed from the negotiation. Instead of negotiating with a Seller who effectively is an opposing combatant with the objective of getting more money while the Buyer wants to pay less, in the context of a bidding war it is the multiple Buyers who become the opposing parties competing for the prize. There simply isn’t any negotiation when you’re blindly bidding against someone else who wants the same asset. It ultimately becomes a contest to see who is Top Dog that can throw down the highest price, the largest deposit, and meet all the terms requested by the Seller. And I will attest from experience, that when the list low holdback approach is executed strategically, that final sale price accompanied by a huge deposit that will be held in their real estate broker’s (or lawyer’s) trust account is often very pleasing for the Seller.
In a nutshell, with more Sellers subscribing to this winning strategy, and with even more Buyers willing to participate, it results in bidding wars becoming increasingly commonplace in the market. And this contributes to driving up prices.
Tales From The Toronto Real Estate Trenches
It’s always fascinating to see some real-time examples, so I’ve pulled a few here so you can look through my lens on some of the recent sales of Toronto real estate in this Tales From The Real Estate segment. Your jaw may reach the floor by the end of this section!
A 3Bed 3.5Bath Semi-Detached House In The Mount Peasant East Neighbourhood
Yes, this was a swell dwell renovated to a high spec quality that tapped into providing the trifecta of real estate – a demand location, a well-proportioned space plan including a family-room addition and full finished lower level with walk-out, and fixtures and finishes that were very much on-trend. This 9-year-old post still rings true today –> Seven Home Runs To Achieve Top Dollar! while this one has lots of my essential design tips –> How To Recognize Architectural Design Features That Increase Resale Value.
• 15 offers – Listed at $1,749,000 – Sold for $2,111,337 – 21% over list
What I want to mention in this post – and if you’re following this closely you’ve been reading about how fast prices are going up – but prior to this sale the most expensive 2 storey semi to sell in the Mount Pleasant East MLS Neighbourhood was in November 2020 for $1,975,000.
A 3Bed 1.5Bath Detached House In East York
In contrast to the listing above, this 1943 detached residence was pretty-much land value. Virtually everything except the structure needed to be replaced (though the basement did need to be benched or underpinned), including all the major building components. Still, located near Donlands and O’Connor, it had a generous city lot of 31×122 feet with a private drive which assured it would be highly coveted. Here’s a blog of mine explaining How Toronto Real Estate Is Shifting From ‘Fixer-Upper’ Flips To ‘Tear Down’ New Construction.
• 39 Offers – Listed at $899,000 – Sold for $1,150,000 – 28% over list
The sale price aligns with what detached houses in the area were garnering in November 2020, except at that time you could secure something upgraded and in move-in condition (but not necessarily to the tastes of today’s Buyers who consider a 7-year-old kitchen to be dated). By my estimate, this dwelling needed an instant cash injection of $250,000 before one could occupy it, though I suspect the successful Buyer may embark on a more comprehensive dig-down and rear addition. Navigating this predicament? Check out my post –> Should I Renovate My House In Stages Or Do A Full Gut?
A 2Bed+Den 2Bath Semi-Detached House In The Beaches
If there’s one thing I can attest to, it’s that Torontonians love their all-white houses right now. If you’re really looking to get top dollar, you will want to ensure your property aligns with exactly what is trending in decor according to the popular purveyors in the shelter media. And this is coming from the guy who started renovating houses 35 years ago when all the rage was layering as many Laura Ashley small print floral patterns of wallpaper as one could throughout your dwelling. Want a giggle? I sold a Victorian working-class rowhouse on a private street in Cabbagetown which, before coming to market, was peppered with six different Laura Ashley wallpapers from the 80s. It made my eyeballs ache, and my Seller – who had been renting the house for decades – and I lamented how we had become victims of that aesthetic. Fortunately, my Seller followed my counsel and hired my contractor to complete a comprehensive $20,000 aesthetic tune-up that included installing new flooring and painting the entire place white. The investment – along with completing a Style Enhancement with local purveyor Spruce Decor – paid in spades with the resulting bidding war. Pay attention to this people and Behold The HGTV Effect On Toronto Real Estate. Selling your home? Check out Why Home Staging Is Important When Selling Real Estate.
• 31 Offers – Listed at $897,000 – Sold for $1,351,000 – 51% over list
In November 2020, comparable sales to this property were selling for $1,200,000. Astonishing, really!
A 3Bed 2.5Bath Townhouse In Mississauga
Built in 2009, this Mississauga townhouse is the poster child of The New Space Race, as 71 Buyers leaped at the chance to live lockdown in a three-level turn-key townhouse. Imagine being the Seller and having your realtor call to say they’re going to be delayed because they’re cataloging nearly six dozen Offers rolling in on your property. I have lots of empathy for the listing realtor as navigating that many bids would have been a nightmare. The most bids I’ve had on a listing totaled 25 for an authentic loft at 43 Hanna in The Toy Factory, which I wrote about here if you’re looking for a perspective that isn’t published very often –> Anatomy Of A Bidding War In The Toronto Real Estate Market.
• 71 Offers – Listed at $789,000 sold $966,000 – 22% over list
In November 2020, a near identical townhouse just doors away sold for $825,000. Seriously, I’m speechless!
Words Of Counsel From A Veteran Realtor
The secret to success in real estate remains constant – no matter the season. Approach with caution, make data-driven decisions, and exercise patience rather than panic.
Address your goals realistically. Know your financial capacity specifically. Pursue with intention.
Your strategy must be fluid enough to respond to market dynamics, but not so elastic that emotions and the proverbial heat of the moment pushes you towards a decision that may not ultimately yield the results you desire. Get your ducks in a row and be ready to act, but be ready to walk if what you believed the potential opportunity actually doesn’t meet your essential needs. Buying Toronto real estate is as much about patience and faith as it is about executing your plans.
When the market is moving swiftly, whether you are a Buyer or a Seller, you need to have an experienced ally to help you hone your real estate strategy in real-time to help you realize your goals. At Urbaneer, we have the skills and the knowledge to help you plan, consider your options, and execute your chosen strategy successfully. We’re here to help!
If you’re curious to learn more about shelter in these changing times, here are some of my blogs exploring the influence of the pandemic on the housing industry, and the intersections between COVID-19 and Toronto Real Estate:
The experience of owning a home extends far beyond the walls of your residence; including its community and support infrastructure; and its accessibility to amenities that enhance your health and well-being. For those considering a purchase, the pandemic has prompted a shift in focus for many Buyers who are evaluating their next move. Now more than ever it makes good sense to engage a realtor who can guide you with a well-researched, data-driven, tactical strategy.
Considering selling? As a realtor with a comprehensive multi-disciplinary education in shelter, and 28 years of experience in the sales and marketing of Toronto real estate I can assist you in achieving Top Dollar for your property.
My team and I would love to help!
May we be of assistance to you, or someone you love?
Thanks for reading!
-Steve & The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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*Love Canadian Housing? Check out Steve’s University Student Mentorship site called Houseporn.ca which focuses on architecture, landscape, design, products, and real estate in Canada!