The balance of power in the Canadian real estate market is leaning towards the buyers, but it is actually the sellers who are driving prices down at the moment.
“Sellers are leading the market decline,” says John Pasalis, president of Realosophy Realty. “They start undercutting 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 east end of town.
The home was listed with an asking price of $899,000 and an expected night’s supply in May. The Buyers were the only bidders at the table that night and they bid $990,000.
The sellers wanted a lot more, and at first they even refused to sign the offer. After some cajoling from Mr. Pasalis, they responded with a counter offer of $1.15 million. Buyers couldn’t exceed $1.05 million, so the deal died.
A month later, Mr. Pasalis received a call from the listing agent informing him that the sellers were now ready to sell for $1.05 million. When Mr. Pasalis informed the customers, they were delighted. But he also informed them that house prices had fallen further during that month.
“When we looked at the sales, we weren’t as comfortable with that value anymore,” says Pasalis, who pointed out that slightly nicer homes are now selling at that price. “They agreed with us.”
The buyers changed their offer to $999,000. The sellers rejected them again and relisted the house for sale at the asking price of $1.05 million.
Meanwhile, buyers began to see more properties appear in their price range in the West End, where they preferred to live. Areas that were overpriced in the past suddenly found themselves within their budget.
The east house stayed for another month until it finally sold for $920,000.
So why are first-time buyers in the market if prices look set to fall further?
Mr Pasalis says buyers today are the same ones who were discouraged earlier this year as they lost house after house to more aggressive bidders. Now they are relieved that they can finally afford to buy, but they are also worried about paying too much, he says. They know that prices may continue to fall.
“We were always offering a bit below value because we were anticipating the market,” he says, referring to efforts to get a deal for the eastern house.
His advice to shoppers is to be patient – and a little greedy.
Sellers, meanwhile, always seemed to be a month or two behind the market. Pasalis says some owners 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 neighborhood and one of the sellers urgently needs a deal, that owner is likely to give in first on price. The other three then face pressure to cut their prices as well.
Bank of Nova Scotia economist Farah Omran sees the same scenario and expects the Canadian housing market to stabilize.
Investor demand, for example, has played an outsized role in driving up prices during the pandemic, Ms Omran notes, and some speculators have also been rushing to get out as interest rates rise.
Investors tend to have higher debt-service ratios than people living in their homes, she says, so they’re disproportionately sensitive to rate hikes. As investor demand subsided, selling slowed more sharply than many market watchers expected.
“The impact of them leaving the market could adjust,” she says.
At the same time, people with an urgent need to sell can push prices down at this time. A homeowner who has purchased another property without selling an existing home first might feel pressured into a deal.
In this context, many people who buy houses to live in are still making agreements, she points out.
Ms Omran acknowledges that some industry watchers are skeptical of the value of the mortgage ‘stress test’ federally regulated lenders are applying to some borrowers, but she believes the measure has helped ensure homebuyers can afford higher rates.
Currently, the stress test requires borrowers to have enough income to cover a mortgage at 5.25%, or the contractual mortgage rate plus two percentage points, whichever is greater.
Ms Omran says a decrease in buying power will keep some first-time home buyers out of the market after the Bank of Canada’s four increases so far this year.
Because of this buffer, she doesn’t expect to see a wave of people defaulting on their mortgages.
It still expects the Bank of Canada to raise its interest rates again in September. The benchmark rate will likely end at 3.5%, she said, and stay there until next year.
The real estate market is rocked by many forces right now, she said, and it’s hard to predict how buyers and sellers will react in the months ahead.
At the moment, the psychology has changed and potential buyers are expecting further price declines. The more their expectations are confirmed, the longer the slide can last.
Many Bay Street residents predict a 20% decline in house prices from peak to trough. Ms. Omran points out that this estimate is an average across the country.
Some regions have already seen their markets fall by 20% and could have another 20, she says. Other places, like Alberta, where the economy is being helped by rising 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 thinks many consumers will abandon the fence out of necessity.
“You can’t wait forever if you need a roof over your head to house your family.”
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