A Story supporting a Widespread Problem
Emma and Andrew are currently living on rent in a small condominium in Brampton, Greater Toronto Area, for the past five years. They are both employed in established multinational corporations, have good credit scores, and have even accumulated a substantial down payment.
But every time they lose their shortlisted homes, by often outbid by the other buyers.
“The list price or asking price is just for the namesake. It has happened umpteen times to us now that we shortlist a few properties based on our budget, and we lose them.
I do not know why it happens and how we can be more competitive. I feel we can never own something, which me, Andrew, and our kids can ever call “home”,” said a disgruntled Emma after losing her 14th shortlisted property in the Greater Toronto Area.
Emma and Andrew are not alone. They are a part of a group of tens of thousands of homebuyers who cannot compete and win houses in a hot housing market.
But why is this happening? And why are houses in Canada selling for way over their listed prices? Let us discuss this and know some of the best reasons that drive the market crazy.
Three Major Reasons to Push Real Estate Prices
The market forces of demand and supply drive the real estate market prices. Any market such as Toronto and Vancouver, which witnesses a robust demand, but limited supply, often enters an aggressive bidding mode.
Below is a list of some of the genuine factors that are making the real estate prices go North:
1. The Bidding Process and A Crazy Rule of Thumb
As per eminent professor Joel Horowitz, in the early 90s, the houses never sold for a price above their listing price. Instead, the asking price used to act as a ceiling, and most deals materialized below this ceiling.
However, times have changed now, and that is too drastic. In the present-day real estate market, the houses sold at way above their list price. Recently a deal materialized in Cottage Country, North of Toronto, where a property went for double the asking price.
Most real estate agents lay the blame on the blind auction process, which is for selling the houses.
In Canada, all properties are in high demand and are at strategic locations sold via a sealed-bid auction. In this process:
- The buyers are required to bid on the offer date
- They all bid on the same date and
- They bid in such a way that nobody knows what the other buyer has bid on.
Further, bidding completes in two steps:
- The interested buyers enter the auction process by registering an intent to bid
- They place their bids before the deadline, which is typical for prospective buyers.
Last, the real estate agents try to hike the buying price by following their so-called “rule of thumb.” Per this rule, the real estate agents will increase the property list price by 5% for every “intent to bid” received.
For example, if a property is listed at $500,000 and has received ten valid “intent to bids,” then:
- The agents will increase the list price by 50% (10 bids * 5%)
- The revised list price will be $750,000 ($500,000 * 150%)
- We assume that out of these ten bidders, someone will purchase the property at the revised listing price.
2. The Game of Real Estate Bullies
Do you remember that bully from your high school who always dominated and pushed the young kids around? If yes, exercise caution, as they exist in the real estate markets.
The Canadian housing market accommodates some of the most desperate and resourceful home buyers, ready to throw away every process set by the seller of a housing property.
They usually operate in hot markets and try to manipulate the seller by offering insanely lucrative deals, which expire in less than 60 minutes.
“They surprise the seller and can create a WOW effect. They know this art, rely on timing, and bleak chances that they will not get away with the target property,” said Emma.
The properties the bully buyers purchased get re-listed within a brief period at a higher price. It drives the average home prices of a housing market upwards, and the innocent new homebuyers must purchase the properties at an extremely high premium.
Sometimes, the bully buyers offer an unconditional offer to the seller of a property that is as high as $150,000 more than the asking price of that property. They do not let the auction process take place as the seller usually accepts their high-paying deals.
3. Goodbye Pandemic! –But, Say Hello to the High-Priced Real Estate
Philips Williams is a veteran real estate agent who operates in the Greater Toronto Area. “Owing to my calculations, I thought Covid-19 cools off the housing market, and the prices will go down. But contrary to my belief, the prices are soaring high. The Toronto and Vancouver housing markets are becoming unaffordable.,” said Philips.
The pandemic made people stay in their homes. They work from their home-based little offices while their children jump on the couch. The pets were not too far, and everything got far too cozy and messy.
It prompted many people to change their priorities and shift to bigger, spacious houses with more amenities or features.
The low-interest rates and the freedom to work from home compelled families to invest in bigger homes. It created a demand for houses, and people were ready to shell out a price almost double that of the asking price.
“This trend got sustained in the real estate market and rapidly transformed into a norm. Now everybody feels this happens in a housing market, and we must be ready for it,” said Philips.