Welcome to this month’s installment of Dear urbaneer, where we tackle tough questions put to us from our clients.
This time, one of our clients is drilling down into the mechanics of the market. We all know that Toronto’s property market is hot, hot, hot. But why? Like really why?
Dear urbaneer:
The other night I was at a dinner party when the conversation turned to the Toronto housing market. People were commiserating on the emotional perils involved in bidding wars, and the shocking lengths they had to stretch financially to secure the property they wanted. What we all agreed on was how the real estate market keeps getting hotter. But where we differed was on the reasons why this market keeps steaming ahead. While most argued it's about supply and demand, I think it’s more complicated than that – especially because of the strength and length of this market boom. Can you settle this dispute?
Signed,
What's behind this crazy market?
Here's our response:
Dear Crazy Market,
You pose an interesting question. While realtors spend a lot of time developing strategies for both buyers and sellers to navigate this white hot property market successfully, not many are sufficiently exploring the “whys” behind it all. Namely, why do prices keep going up, up, up? As we’ve said numerous times at urbaneer.com, when it comes to real estate, knowledge is power. It’s your way of standing your ground and maintaining control in this swiftly moving market.
Did you read Maclean’s magazine’s recent cover story titled “Thought The Real Estate Market Couldn’t Get Any Crazier? Think Again?” , because it hit the nail on the proverbial real estate head. Macleans addressed a swirling dervish of factors including the infamous economics of supply and demand, how buying and selling activities falsely inflate property values, alongside the more human factors like greed and status which influence values. We thought we'd add our own commentary on these truths.
The Dream Of Home Ownership
For many, there is a natural trajectory of life events: school, employment and eventually home ownership. While homeownership is really a means to an end – in that it provides one of most essential of needs in shelter – it also provides an excellent “it's almost just like rent” investment with the chance to grow your wealth over time. Additionally, home ownership claims a certain status and security, to which many people subscribe.
What happens in this circumstance, in a market like Toronto, is that there isn't a whole lot of grey area. Given the fast moving pace of the market, if the status of home ownership is a goal for you – and you're on a quest to present yourself as being biographically on cue – you literally are in, or you’re out. As Toronto real estate prices continue to climb, the window to jump through into home ownership begins to shrink for those with limits on affordability. This means panic begins to set in.
As market conditions fuel fear and stress, the heart begins to rule the head for those trying to get in. Buyers are willing to pay what it takes in many cases to get into the market. Conversely, Sellers who are aware of this dynamic are fully prepared to ask (and expect) huge sums for their properties. Some characterize this as greed, but many more characterize it as a shrewd strategy that the market dynamics not only permit, but support quite well.
The impact of this push and pull of panic met with greed and high expectations? Property values continue to climb, because as long as Buyers are willing to pay what Sellers are asking, they will continue to rise. It’s a bit of a chicken-and-egg scenario, because each party needs the other for this dynamic to continue.
The other offshoot of this market dynamic is that the gap grows between the real-estate haves and have nots. Much like the shrinking middle classes in our general demographics, those who are in the market (and those that are able to gain access, even by the skin of their teeth) will continue to ride the wave. Those that are unable will see their dreams pull further away from the shore, as that particular wave goes on. This has socio-economic impact, which is something that urbaneer has touched on several times in the past. Click here to read our urbaneer post called “Interest Rates, Affordability And The Toronto Housing Boom.”
Because of the depth and growing width of this “have/have not” gap, there is too growing animosity between the two factions, which does have social ramifications.
The Bully Offer
We were all familiar – one way or another – with the schoolyard bully when we were kids. This same phenomenon is continuing to grow in the Toronto housing market. Some estimates suggest the occurrence of bully offers has tripled compared to last year. It's certainly the case from our experience.
A bully offer happens when a Buyer registers an offer shortly after a property comes to market instead of waiting for the prescribed offer night which is typically a week later. What usually happens, is that for the Buyer to entice the Seller to take their place off the market without adequate exposure, is that the offering price has to be well above asking – as in ten percent or more – in an effort to secure their hold on the property.
The Maclean's article we referenced above refer to this as the “equivalent to a military shock and awe campaign” which is a particularly apt description. The idea is that the offer has to be so substantial that the Seller feels compelled to take it. This also feeds into that ever-present emotional component of the market – panic, frenzy and general chaos. The combination of these factors serve to increase property prices even more.
What is concerning here is the rapid increase of the use of bully offers as a strategy. It reflects Buyer frustration, but also shows a rather unpleasant underbelly in this frenetic market: intense chaos with a slightly savage tone – the side-effects of intense, win-at-all costs competition.
The urbaneer team are extremely familiar with the bully offer scenario. In fact, we've written about it in the past. Here's a recent post called “Dear Urbaneer: Why Is The Toronto Real Estate Market So Hot?” that shares two bully offer examples straight from our own real estate trenches just recently (one for more than $300,000 more than the list price!). And here a past urbaneer post on “Bully Offers And Bidding Wars.” that offers a more detailed explanation.
Who’s Your Neighbour?
Another factor is the growing phenomenon that sees a Buyers – often a flipper or a builder – coming in and snapping up a dwelling, gutting it to the studs and slathering all sorts of high end finishes and fittings in it, or knocking it down and building a monster home on the parcel of land. We've written a fair bit on our disdain for poor flippers (though we're on board with those who create excellent housing. Here's some of our past posts including To Code, Or Not To Code? and We Flip Flapjacks, Not Houses!
This phenomenon – which is happening across all urban neighbourhoods – fuels an increase in the property values in the area, while potentially damaging the visual character, and changing the resident profile of that specific area. When it comes to communities, continuity can matter – a lot. This begs the question, is it worth driving up hefty property prices at the expense of neighbourhood character and community well-being?
This works in the reverse as well, when neighbourhoods filled mostly with single family homes find themselves new neighbours to increased intensification, like condominium buildings. Either way, when you vary too far from the perimeters of the general look and lifestyle of a neighbourhood, you risk creating a wedge amongst new and old guard residents. While some may say this isn't very neighbourly, cities are in constant flux and change. So the question is, are neighbourhoods allow to change too?
More Insights From urbaneer.com
Five years ago we published Understanding Our Market Momentum which is as valid now as it was then. In this post we identified how migration and demographics, our propensity to climb the property ladder and the role of the media have contributed to the escalation of prices.
And let's not forget the generational wealth. Here's a great past post called “Is The Bank of Mom and Dad Behind Rising Housing Prices?“
Do you wonder why there's a shortage of listings? In this post called Ready To Buy, we explore how the slimming profit margins are reducing the number of flips, the costs associated with raising children, and the significant expenses associated with making a move are impacting the filtering of housing stock in the City of Toronto.
Are you left scratching your head with all the ins and outs of the Toronto housing market? Urbaneer has both the knowledge, training, education and experience to help you fully understand the meat of market dynamics- and to help translate it into a winning strategy for you, whether you are buying or selling. We are here to help!
~ Steven and the urbaneer team
– earn your trust, then your business –
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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Dear Urbaneer