Tara Perkins – Globe and Mail

Last month, Anthony Wright sold his Mis­sis­sauga town­house for more than ask­ing. He still feels badly about it.

Mr. Wright’s agent, Lynne Tham, listed his house on a Mon­day and accepted offers one week later. Six real estate agents came in and made an impas­sioned plea for their clients. Mr. Wright, a sin­gle father of three girls who deals with stress­ful sales sit­u­a­tions in his pro­fes­sional life, was overwhelmed.

Most of the agents fol­lowed pro­to­col and came alone. Except one, who had fig­ured out that his client, a sin­gle mother of three, had some things in com­mon with Mr. Wright.

“He actu­ally brought the client in with him, which was so unusual,” says Ms. Tham. He hoped that his client might be able to per­suade Mr. Wright to choose her offer.

“She was a nice-looking lady and she was dressed up, she came in look­ing like a mil­lion dol­lars, she wanted to plead her case,” Mr. Wright says. “It was extremely emo­tional and stress­ful, because she was try­ing to explain her sit­u­a­tion, that she was in love with the house and needed it because she has her three daugh­ters and is try­ing to do her best. She was extremely ner­vous and said she couldn’t sleep.”

But she wasn’t the high­est bid­der, and Mr. Wright rejected her offer. “I’m glad that I got $20,000 over my ask­ing price, but I really feel sorry for the lady,” he says.

His agent, a sea­soned pro­fes­sional, was sur­prised by the whole ordeal. “It was mind-blowing how much we actu­ally got,” Ms. Tham says. “But it’s so tir­ing for these bid­ders, because this might be the third or fourth time that this has hap­pened to them in a week and a half, so they’re exhausted. On a human level, you just feel really bad for them.”

Bid­ding wars are not a new phe­nom­e­non in the Greater Toronto Area, but in 2012, the stakes have been ramped up. Case in point: the Wil­low­dale bun­ga­low that sold for $1,180,800 this month – $421,800 over the ask­ing price.

Com­ment: But it was WAY under-priced. Mar­ket value for that house was about $1,000,000 mak­ing the final sale price a lot closer to real­ity than you are being led to believe!

Fueled in part by his­tor­i­cally low mort­gage rates, an influx of for­eign money and a lack of hous­ing stock, many prospec­tive buy­ers are now stretch­ing their finances too thin in order to get a home. This, at a time when econ­o­mists say Toronto house prices are already too high and Cana­dian con­sumers over-indebted. Finan­cial advis­ers worry about the con­se­quences these peo­ple will face when inter­est rates rise and their monthly mort­gage pay­ments become less afford­able. Add to that the strong pos­si­bil­ity that house prices will fall from their cur­rent lev­els (What? No, there is NO pos­si­bil­ity that prices will fall. Not now, not any time soon. Even if they do, the long term will see them rise. Even the peo­ple who got caught up in the crazi­ness of 1989–1990 have made their money back.), and in the months to come many peo­ple who are get­ting caught up in the cur­rent frenzy may come to regret the bat­tle they fought so hard to win.

Com­ment: And the lat­est num­bers show our debt lev­els are going down. Good to see that peo­ple are pay­ing attention!

Stok­ing the spring market

Ben­jamin Tal is deputy chief econ­o­mist at CIBC. In his view, “there is no debate any more that the hous­ing mar­ket, regard­less of where you live in Toronto, is def­i­nitely expen­sive,” he says. “It’s too expen­sive, it’s over­shoot­ing.” And it’s only going to get worse in the near future.

Com­ment: This is what hap­pens in cities. Most peo­ple can­not afford to live in down­town Boston or Seat­tle or Chicago. If Mon­treal did not have the sep­a­ratist silli­ness, they would be in the same boat – and will be soon enough. Never mind New York or Lon­don, even lower-level cities are expen­sive to live in.

March and April are tra­di­tion­ally the peak time of year for house sales, with many fam­i­lies seek­ing to buy now so that they can take pos­ses­sion dur­ing the sum­mer and avoid hav­ing to pull their kids out of school before June.

“It’s prime time for sell­ers and for buy­ers,” says Jim Mur­phy, the CEO of the Cana­dian Asso­ci­a­tion of Accred­ited Mort­gage Professionals.

At the same time, the major banks brought back 2.99% fixed-rate mort­gages last week, after exper­i­ment­ing with them in Jan­u­ary. These ultra-low rates are only avail­able for a lim­ited time, and are there­fore expected to lure even more prospec­tive buy­ers into the mar­ket this season.

Com­ment: Only BMO had the 2.99% before. And even with­out that deep dis­count, 5-year rates are 3.49% or less.

With inter­est rates low, more peo­ple are overex­tend­ing them­selves. The pro­por­tion of home­own­ers with less than 20% equity in their home and a debt-service ratio of more than 40% has risen from about 2% to about 3% in the last five years or so, says Mr. Tal.

Com­ment: More peo­ple are buy­ing, they do not have the mas­sive down pay­ments. The monthly costs are not bad with low rates, but 20% of $600,000 is still a lot more than 20% of $200,000. And how is it, if they can afford it, it is over-extending? Our banks do not lend more than they think you can afford. Our banks are strict. Our banks have pre­vent­ing the chaos we have seen south of the bor­der or in Europe. It is sim­ply not pos­si­ble to over-extend, you can­not get the money.

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.

Com­ment: No, it is not inevitable. It does not NEED to hap­pen. It might, but it is not likely. The most plau­si­ble sce­nario is that rates rise, buy­ing activ­ity slows down, price appre­ci­a­tion slows down. Prices may flat line, but they will not go down. Not one bit.

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.

Com­ment: You mean in all cases.

“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% over asking.

Com­ment: But how does that com­pare to what she wanted? We keep leav­ing out the impor­tant parts. We know that is was under priced, but by how much? If it was 10% below mar­ket value, then it was only 2% over. That changes things…

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.

Com­ment: And that is the biggest prob­lem right now – 10x the buy­ers for every house. Until we get 1,000% more list­ings, prices are going nowhere but up.

“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.”

Com­ment: And the next bid­ding war has 6 offers. And the next one has 7… We keep adding buy­ers, but not list­ings. For every new list­ing, there are 2 or more new buyers.

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.

Com­ment: Racist.

“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.”

Com­ment: Because the extra $100,000 is about $380/month. And if it means the house of your dreams…

His agent, Ian Wil­son of Royal LeP­age, says that houses in the neigh­bour­hood are fre­quently going for 7–11% over asking.

Mr. Schmelzer believes easy access to credit is to blame. “I go to the bank to get preap­proved for a mort­gage, and I’m think­ing a max­i­mum $600,000 mort­gage, and the bank is telling me ‘why so lit­tle? Why don’t you go to a $900,000 or $1-million mort­gage?’” he says. “I answered that I guess they don’t mind me pay­ing my mort­gage until I’m in my mid 70s or 80s.”

Com­ment: I some­how doubt banks are doing that. They may tell you that you qual­ify for $900,000, but if you only want $600,000 then that is that. And if you only qual­ify for $600,000 no bank in Canada will give you $1,000,000. Seri­ously, what kind of fan­tasy is this?

But there are signs that the banks are not will­ing to lend to just any­body. For instance, Toronto-Dominion Bank’s mort­gage arm TD Financ­ing Ser­vices Home Inc. recently decided it will stop giv­ing mort­gages to “non-prime” bor­row­ers (those with bad credit his­tory or credit scores) start­ing at the end of this month, because the bank felt that stay­ing in that line of busi­ness would require it to take on too much risk.

Com­ment: They don’t, never have. That is why they are the envy of the entire world.

And, Mr. St. John points out, there are even bid­ding wars for rentals right now. “There just isn’t enough prod­uct on the mar­ket,” he says, espe­cially in hot neigh­bour­hoods. For instance, he points out that out of roughly 5,000 homes in Lea­side, there are usu­ally about one dozen for sale.

Com­ment: And 200 fam­i­lies that want them.

Hot mar­ket, shady tactics

Renee Frigault and her part­ner started their house hunt after Christ­mas and are still look­ing. “In the last two months, we’ve put in offers on three sep­a­rate houses, every time los­ing by the skin of our teeth,” she says. They lost the first one by less than $5,000 because they didn’t like the seller’s tactics.

“The seller’s agent swore that offers would be a one-shot deal,” she says. “Tak­ing them at their word, we put in our best offer and had the high bid. Then, of course, they sent back for re-bids. We were sur­prised by the flex­i­ble ethics and walked away.”

Matthew Slut­sky and his wife Car­lie Brand sold their down­town condo in Novem­ber and have been search­ing for a house ever since. They’re cur­rently stay­ing with Ms. Brand’s par­ents. But they refuse to give in to auc­tion fever.

“I help sell hun­dreds of mil­lions of dol­lars of new con­struc­tion, but I can’t find a resale house for myself,” says Mr. Slut­sky, 32, who is the CEO of real estate site BuzzBuz​zHome​.com.

So he and Ms. Brand have taken to going door-to-door and hand­ing out let­ters at ran­dom houses they like to see if the own­ers would con­sider selling.

“We’ve had a few calls back,” he says.

Com­ment: And until we get more list­ings, that is the sad state of things. I have sent let­ters for clients, doing the same thing. There is nowhere near enough prod­uct out there. Which is why there are bid­ding wars. Which is why prices keep going up.

—————————————————————————————————–
Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–