Since the beginning of April, the Toronto real estate market has shifted into an even higher gear. Prices for the first two weeks of April averaged $483,165, 12% higher than the same two weeks last year; up until the end of March, prices were tracking about 4-5% ahead of last year.
This is perhaps not too surprising: the inventory of homes for sale remains extremely low at approximately 1 ½ months’ supply (anything below 3 months’ supply is generally considered to be “sellers’ market” territory); and mortgage interest rates also remain very low, with no significant changes expected before the summer at the earliest. The charts below summarize the price and sales information:
One might think that more homeowners would be tempted to put their houses on the market with prices rising so quickly. However, these potential sellers need someplace to go once they sell, and with homes for sale so scarce, few sellers are willing to risk selling before buying – and so the low inventory tends to be self-reinforcing.
With so many buyers chasing so few homes, multiple offers are becoming the norm in neighbourhoods like Bloor West Village, High Park, The Kingsway, Sunnylea, The Beach, and just about anywhere in the downtown core.
Here is the typical pattern when a seller tries for multiple offers: the home is listed for sale early in the week; open houses are held the following weekend; and offers are invited early the following week, about one week after listing. The aim is to have as many potential buyers as possible see the house within a compressed time frame, and to create excitement (and pressure!) to encourage offers.
The so-called “bully offer” is also becoming increasingly common. In these situations, a buyer wants to avoid the competition on “offer day” and so makes an earlier pre-emptive offer in an attempt to “bully” the seller into considering his offer ahead of time.
The offer is typically very strong, without conditions and well above the asking price. This is very tempting to the seller, who cannot be absolutely sure of receiving multiple offers on the offer date. It’s a classic “bird in the hand versus two in the bush” situation.
In some cases, the pre-emptive offer elicits other competing offers anyway, but the “bully” hopes to mitigate the competition by catching other buyers off-guard and not yet prepared to make an offer. High stakes poker indeed.
So, when will our hot market finally cool down? Most likely, it will take an increase in interest rates. Five year fixed mortgages are still available at approximately 4%, and so an interest rate increase of just 1% represents roughly 25% increase in monthly mortgage payments.
It won’t take much of a rate increase, therefore, to significantly reduce what buyers can afford and potentially force many buyers out of the market. This will reduce the ratio of buyers to sellers and bring the market into better balance. Prices may not fall, but they should at least go up more slowly!
Most pundits are predicting that the Bank of Canada will start increasing the bank rate in July. Paradoxically, this could actually extend the hot market into the normally slow summer months, as buyers try to take advantage of interest rates that were “locked in” before the increase. These rate guarantees will mostly expire by the end of the summer, and this could make for a less than robust bounce-back in the fall… possibly the beginning of a slowdown?
Some buyers are thinking that, if the market is going to slow down, then they should put off their purchase until next year and avoid the current frenzy.
However, most buyers understand that, even if house prices fall, their monthly payments will still probably be higher next year than if they purchase in the present low-rate environment.
For example, let’s say you could purchase a certain house today for $500,000 with a $50,000 down payment. Your monthly payments on the $450,000 mortgage at 4% interest, amortized over 30 years would be $2,148. Now, let’s say prices fall by 5% by next year and mortgage rates rise by 1.5%. The price of the same house would now be $475,000, and your monthly payments on the $425,000 mortgage at 5.5%, again amortized over 30 years, would be $2,413, $265/month higher than if you bought this year! Hence the eagerness of most buyers to purchase before interest rates go up… and so the heat goes on.