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Homes for sale on Woodfield Road, in Toronto’s east end, on August 3.Fred Lum/The Globe and Mail

The power balance in Canada’s real estate market has tilted toward buyers, but the sellers are actually the ones driving prices down at the moment.

“Sellers are leading the market decline,” says John Pasalis, president of Realosophy Realty. “They’re starting to price lower than the competition just so they can sell.”

Mr. Pasalis recalled the story of two Toronto buyers he represented who bid on a small, two-bedroom house in the city’s east end.

The house was listed with an asking price of $899,000 and a scheduled offer night in May. The buyers were the only bidders at the table that night, and they offered $990,000.

The sellers wanted a lot more, and at first they refused to even sign back the offer. After some cajoling by Mr. Pasalis, they responded with a counter-offer of $1.15-million. The buyers couldn’t go higher than $1.05-million, so the deal died.

One month later, Mr. Pasalis received a call from the listing agent, advising him that the sellers were now willing to sell for $1.05-million. When Mr. Pasalis informed the clients, they were ecstatic. But he also advised them that house prices had declined further during that month.

“When we looked at the sales, we weren’t as comfortable with that value any more,” says Mr. Pasalis, who pointed out that slightly nicer houses were now selling for that amount. “They agreed with us.”

The buyers changed their offer to $999,000. The sellers spurned them again and relisted the house with an asking price of $1.05-million.

Meanwhile, the buyers began to see more properties popping up in their price range in the west end, where they preferred to live. Areas that had been too expensive in the past were suddenly within their budget.

The east-end house sat for one more month until it finally sold for $920,000.

So why are first-time buyers in the market at all if prices seem likely to fall further?

Mr. Pasalis says today’s buyers are the same ones who were despondent earlier this year because they lost out on house after house to more aggressive bidders. Now, they are relieved that they can finally afford to buy, but are also anxious about overpaying, he says. They know that prices may continue to slide.

“We were always offering a little bit below value because we were anticipating the market,” he says, referring to the efforts to secure a deal for the east-end house.

His advice to buyers is to be patient – and a little bit greedy.

The sellers, meanwhile, always seemed to be a month or two behind the market. Mr. Pasalis says some homeowners are stubborn about getting the price they want, but they come up against owners who may be more motivated. If four houses are for sale in the same neighbourhood and one of the sellers urgently needs a deal, that homeowner is likely to cave first on price. The other three then face pressure to trim their prices as well.

Farah Omran, economist with Bank of Nova Scotia, is seeing the same scenario and she expects the Canadian real estate market to stabilize.

Demand from investors, for example, played an outsized role in pushing up prices during the pandemic, Ms. Omran notes, and some speculators have also been quick to exit with interest rates rising.

Investors tend to have higher debt service ratios than people who are living in their homes, she says, so they are disproportionately sensitive to rate hikes. As demand from investors vanished, sales slowed more abruptly than many market watchers expected.

“The impact of their leaving the market might adjust,” she says.

At the same time, people with an urgent need to sell may be dragging down prices at the moment. A homeowner who purchased another property without selling an existing home first might feel pressured to secure a deal.

Against this backdrop, many people buying homes to live in are still striking deals, she points out.

Ms. Omran acknowledges that some industry watchers are skeptical of the value of the mortgage “stress test” that federally regulated lenders apply to some borrowers, but she believes the measure has helped to ensure that buyers can afford higher rates.

Currently, the stress test requires borrowers to have adequate income to cover a mortgage at 5.25 per cent, or the contract mortgage rate plus two percentage points, whichever is higher.

Ms. Omran says a decrease in purchasing power will keep some first-time buyers out of the market all together after the Bank of Canada’s four increases so far this year.

As a result of that buffer, she doesn’t expect to see a wave of people defaulting on their mortgages.

Still, she expects the Bank of Canada to raise interest rates again in September. The benchmark rate will likely end up at 3.5 per cent, she says, and remain there through next year.

The real estate market is buffeted by many forces at the moment, she says, and it’s difficult to forecast how buyers and sellers will react in the coming months.

At the moment, psychology has turned and potential buyers are expecting prices to decline further. The more their expectations are confirmed, the longer the slide may continue.

Many on Bay Street are forecasting a 20-per-cent decrease in real estate prices from peak to trough. Ms. Omran points out that that estimate is an average across the country.

Some areas have already seen their markets tumble 20 per cent and may have another 20 to go, she says. Other places, such as Alberta where the economy is being helped by higher energy prices, will fare much better. And at the national level, she notes that prices are still higher than they were in February, 2021.

Looking ahead to the fall, Ms. Omran believes many consumers will move off the fence out of necessity.

“You can’t hold off forever if you need a roof over your head to house your family.”

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