He believes a housing price correction is inevitable, but that its severity will depend on whether mortgages and house prices continue to grow too quickly or whether they are successfully reigned in before interest rates rise.
Mind over money
While it doesn’t take much to spur a bidding war in a hot Toronto neighbourhood right now, in some cases the frenzy is manufactured.
“There’s obviously a strategy on the part of some realtors to under-price a property to try to get a bidding war going,” says Mr. Murphy. “This is not an unusual tactic at all.”
It’s one that can be highly successful, says Geoff Leonardelli, an associate professor at the University of Toronto who works in both the business and psychology departments.
“There is some pretty amazing research on this notion of bidding wars, and one striking finding is that when the price of a product starts low in an auction-type contest, it actually creates auction fever where more bids result in it being bid up higher than what it might have been had it started at a higher price to begin with,” he says.
One recent seller in North Toronto who did not want to be named said she was surprised when her agent suggested she list her house at a much lower price than she wanted.
“I said ‘I know what I want for this house, and if you set the price lower and someone comes in just above it, I will not accept it,’” she said. “And he said ‘it’s a risk, but I think it’s a risk that pays off because it opens up the amount of people who will come look, and then people get attached to the house.’”
Her house sold for more than 12 per cent over asking.
Mr. Leonardelli says it’s also easier to part with cheap money. “With low interest rates, money becomes more easily available and that means people are in a position to more willingly spend it.”
And with each bidding war, prospective bidders can become a little bit more desperate to get the hunt over with.
“If there is a good property on the market and five offers come in and it sells over asking price, there are four people who are very disappointed,” says Perry Steinberg, a real estate broker with Harvey Kalles Real Estate Ltd.. “So next time they’ll probably go in at a higher price.”
A rise in the number of foreign buyers is also fuelling the market. The woman who bid $421,800 over the asking price for that house in Willowdale was originally from China. Roy St. John, vice-president of Re/Max Condos Plus Corp., just sold a place in Don Mills to a Chinese buyer who was not in Canada but arranged the purchase through power of attorney. The person paid $1.4-million for a unit listed at $1.25-million.
“There’s a lot of Iranian money, there’s a lot of Asian money, there’s a lot of Russian money,” says Ronda Abony, an agent with Harvey Kalles (and Mr. Steinberg’s wife and business partner).
Foreign money is playing a particularly large role in the condo market. Ms. Abony says she’s had foreign clients buy more than a dozen suites at a time.
What’s another $100,000?
Despite all the pressure, many Torontonians say that they are resisting taking on large mortgage debt.
Dan Schmelzer, for one, just decided to throw in the towel after he and his agent spent six months hunting for a larger home for his family of four.
“We’ve given up, we’re not moving,” says the Willowdale resident.
“It’s funny how people have reached the conclusion that adding $100,000 or $200,000 to your mortgage doesn’t mean anything,” he says. “People are throwing around hundreds of thousands of dollars like they’re a pair of socks.”
His agent, Ian Wilson of Royal LePage, says that houses in the neighbourhood are frequently going for seven- to 11- per cent over asking.