An increasing number of homeowners selling property in Toronto and surrounding areas this spring must brace themselves for those dreaded words: “the market has spoken.”
While some sellers are receiving outsized bids on offer night, others are disappointed when they aren’t rewarded with the premium they were hoping for.
In a strange reversal, some sellers’ agents then try to chase down the bidders a week or two later and woo them back to the table. The buyers’ agents may feel they have some leverage: the market has spoken – and the property is not worth what the seller figured it was.
Slower sales have led to some other unusual occurrences: bullies have pulled back and prospective buyers are lobbing bids hundreds of thousands below asking. Others have signed an agreement to purchase but they want the option to move the closing date forward if the interest rate they will pay on the mortgage rises in the meantime.
Some agents have seen buyers bid a hefty price in a bidding war – then have second thoughts and fail to show up with the deposit.
That latest twists come as buyers and sellers respond to figures from the Canadian Real Estate Association, which show that national sales dropped 5.4 per cent in March from February. New listings shrank by a nearly equal amount of 5.5 per cent.
Compared with March, 2021, sales fell 16.3 per cent.
The average price across Canada edged down in March to $796,000 from $816,720 in February.
Andre Kutyan, broker with Harvey Kalles Real Estate Ltd., says some houses are still selling for eye-popping premiums.
He recently sold a contemporary house at 253 St. Clements Ave. in Toronto after listing it with a below-market asking price of $3.6-million. Seven bidders showed up on the day set for reviewing offers and the house sold for $4.25-million, or $650,000 above asking.
Still, the fact that seven buyers waited for the offer date also signals that buyers are taking a less aggressive approach.
“Bully offers have calmed down,” he says. “A few weeks ago they were not waiting for the offer date – they were going in as strong as they could. A few weeks ago the numbers were stronger than what we thought the house was worth.”
On the flip side, some house hunters are trying their luck with lowball offers. Some agents justify the price they are offering by pointing to sales of comparable properties as long as one year ago.
One of Mr. Kutyan’s listings is a house in a popular neighbourhood but on a less desirable street. One couple submitted an offer $400,000 below the asking price of $2.4-million, pointing out that the market has slumped and renovation costs have risen.
“No one’s talking about market conditions when there are five to seven offers. They’re just trying to buy the house,” he says.
Mr. Kutyan recently showed his clients a townhouse in Toronto. The property didn’t suit them but the listing agent included Mr. Kutyan in an e-mail plea one day after the home failed to sell on offer night.
The seller received five bids but rejected all of them. The listing agent stressed how reasonable the seller is and encouraged the other agents to get in touch if their clients are still interested.
“We wanted to sell,” he emphasized.
As buyers and sellers try to navigate a landscape that is shifting under their feet, all eyes are on the Bank of Canada.
The central bank has raised its key interest rate to 1 per cent from 0.25 per cent since early March, and Governor Tiff Macklem has signaled he is prepared to move “forcefully” to tame inflation.
Dean Colling, senior wealth advisor at CIBC Wood Gundy, says people contemplating a real estate purchase are prudent to check their numbers in this new era of rising rates.
“It would certainly cause home buyers to pause – particularly those on the edge of affordability.”
Mr. Colling notes that house prices have had a strong run in the past two years with the help of a tailwind from record-low interest rates.
But even though rates have climbed recently, he points out, they are still not back to pre-pandemic levels.
“This is going to cost people money but it has to be put in perspective – we’re coming off emergency low rates.”
He expects more moderate price growth of about 10 to 15 per cent this year, but he does not see a downturn on the horizon.
Demand is still outstripping supply significantly, Mr. Colling notes, and while some buyers may decide against a big move-up purchase, he expects any hesitancy to be temporary as consumers absorb big headlines on inflation. As for the recent softness in prices in Toronto and other markets, he notes that it’s possible to have a slight pullback within a rising market.
Mr. Collings closely watches the Chicago Purchasing Managers’ Index and other economic barometers – which suggest that inflation may peak in the next quarter or two.
“This inflation level has been born out of unique circumstances,” he says, pointing to the pandemic and global supply chain issues. Central bankers have now jumped on the rising trend, so he sees little reason for concern.
Mr. Colling cautions that tight labour markets and supply chain issues are a couple of the factors that could pose a risk to his outlook, but he does not see the potential for a dire scenario such as a return to 1980s-era double-digit rates.
The message to his own clients, he says, is to be “mindful not fearful.”
At National Bank of Canada, economists Matthieu Arseneau and Alexandra Ducharme note that Canada’s consumer price index came in well above Bay Street’s expectations in March as gasoline, food and shelter all became more expensive.
While inflation likely peaked in March in this country, that does not mean that we will quickly return to a desirable pace, the economists say.
The weakening of oil prices in April bodes well, but meal prices could continue to be pushed up by commodity price jumps. Supply chain issues may linger – especially in China, where a zero COVID policy has led to shutdowns. Possible wage increases may translate into relatively high inflation in services, they add.
“For these reasons, the Central Bank must continue its process of normalizing interest rates, which are still far too accommodating for the economic situation,” Mr. Arseneau and Ms. Ducharme say.
Mr. Kutyan says one impact of the rate increases so far is that some buyers are crunching numbers to see how the closing date on a deal will impact their mortgage.
Buyers who have a pre-approved mortgage from a financial institution often want to make sure the deal closes before that agreement expires.
Mr. Kutyan sold one house to buyers who, at the last minute, asked for flexibility with closing.
If the deal went through after their pre-approved mortgage expires, they would have to pay more in interest. In this case, the seller agreed to an earlier closing rather than trimming some money from the sale price.
When Mr. Kutyan is working with clients who are purchasing a new house from a builder, he often includes legal wording known as an “advancement clause.” The offer states that the closing date will fall within a 60- to 90-day window.
The 90 days gives the buyers a cushion if they need to sell their current home, which may be more difficult in a slowing market. But the advancement clause allows them to move the closing forward if their property sells quickly.
Since the new house is sitting vacant, the clause serves as a sweetener for the seller, Mr. Kutyan explains.
“You want to show the seller you’ve got flexibility, but you’re also giving yourself flexibility.”
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