What’s Wrong With This Market?

I’ve been doing a lot of thinking lately about the residential real estate market here in central Toronto, trying to figure things out. Which is why I haven’t been writing as much as usual (as you may have noticed). I have to say I really don’t like what I’ve been seeing. Not at all. That’s because I’m seeing many, many problems. So many that my head’s been spinning. But I think I’ve managed to divide them into two broad categories so it’s easier to understand what’s going on in the market. These are the two major problems I see with the market today:

  1. The market itself is out of control and irrational. There’s no way to explain many of the prices being paid; and
  2. The selling process often lacks integrity.

Let’s look at each of these a little more closely.

The Market is Out of Control

What do I mean by this? I mean two things: First, that prices are rising too quickly in my opinion (keep in mind that everything I say is just my opinion). And second, that many prices aren’t at all justifiable based on the recent selling prices of similar homes, which is the most often used method to determine home values. 

So why is this bad and why are people complaining about it? Well, it’s not necessarily bad and it’s not everyone who’s complaining. If you’re a seller, it’s actually pretty good and you’re probably jumping for joy.

But if you’re a buyer, there’s a pretty good chance you’ve grown to despise this market because of bidding wars, bully offers, the risk of overpaying, the amount of time and emotional capital you have to invest in your house hunt and the like. While all of these things are distasteful, I believe there’s something more important underlying the strong negative feelings this market has been generating and that’s the fear that prices are rising so much and so quickly that people may never be able to afford a home in Toronto. Whether this fear is founded or not is hard to say, but I know for certain it exists because of the countless times I’ve heard people express it.

Will the government step in to cool the market and put that fear to rest? I don’t know. Should it happen? Depends on how you look at things.

We live in a free market economy. The government CAN step in, but is it possible to micro manage the real estate  market? Remember, the market for semi-detached homes at Yonge & Lawrence is very different from the condo market on the waterfront or the luxury home market on the Bridle Path. Not to mention that Toronto is different from the suburbs and Ontario is different from Alberta. How could the government create different laws for every segment of the market? What’ll happen when prices in Toronto level out while prices in Calgary start to skyrocket? Government intervention would be fraught with difficulties and potentially significant risks to the economy as a whole. Until the government can come up with a way to steer a specific segment of the market without affecting other segments of the market or the economy as a whole, I don’t think government intervention is the answer.

Unless we change the question. Should home ownership be a right for Canadians? It could be treated like healthcare. Just as you have access to free healthcare and the government sets doctors incomes and drug prices, the government could control the housing market, too, by stipulating that mortgage rates always be within a certain range regardless of what’s going on in the bond markets, limiting price increases to a certain percentage each year (this is already done with residential rents) and directing that Canadians be given the first chance to buy homes before they are offered for sale to non-Canadians. Is this the answer?

As a parent of two young adults, I have to say I’m scared. I want our children to be able to fulfill their dreams, but we live in a society where that’s not always possible. Our economy has costs and benefits and on the whole I wouldn’t want to live anywhere else. But I’m not ready to make such a large fundamental shift in our values to turn home ownership into a right so I say we should let the market run its course. Besides, I know it runs in cycles and prices can’t keep increasing at this rate forever.

The Selling Process Lacks Integrity

This problem really gnaws at my gut because I’m part of the selling process.

I see a lot of individual problems with the selling process.  Let’s start with bully offers, which, as you know, is a personal pet peeve of mine. They should be disallowed. It’s as simple as that. You either hold off on offers as you said you were going to do or you look at offers anytime.

Now let’s move on to the practice of setting low list prices. Don’t set a ridiculously low price for your home that you have no intention of ever accepting just to stimulate an auction (also known as a bidding war). In my books, that’s misleading advertising. If you want to sell your home by auction then follow proper auction rules and that includes setting a reserve price you’re prepared to accept.

And how about sellers who set low list prices, receive multiple offers above list price and then reject them all? Imagine walking into a store to buy a pair of shoes. They’re priced at $100. You offer $100 and are told “Sorry. We’re not selling them for $100. We want more.” So you offer $120 only to be told “Sorry, that’s still not enough.” Do you think that would fly or do you think that would be illegal? This example may sound absurd, but it’s exactly what’s happening in the real estate market right now.

I could point to many other problems with the process, but you get the picture –the real estate market is being looked upon as a den of thieves and for good reason. To be clear, I’m not talking about buyers, sellers or Realtors acting unethically. I’m talking about the process and everyone plays a role in the process.

While there are many individual problems with the process about which we hear complaints all the time, the real problem underlying the selling process is that it lacks integrity. You often don’t know what to expect, anything can and does happen and there’s no confidence that everyone is playing by the same rules or being held to the same standards. Once again, fear enters the equation: we fear that someone else is being given an unfair advantage.

Why do I think this is the real problem with the process? Because when I look to the stock market, for example, no one calls for government interference when a stock runs up from $20 to $100 or when Bob sells a stock for $300 that he bought for $30. It’s just not news because people believe, rightly or wrongly, that the stock market is highly regulated and not subject to the kind of behavior they hear about in the real estate market.

The feeling that we have some sort of undeclared right to home ownership, coupled with the fear of other people having unfair advantages and the fear of not being able to ever buy a home create an emotional reaction that results in a cry of outrage.

So what should be done? I believe the process should be cleaned up and standardized. I also believe buyers, sellers and Realtors should be subject to more stringent rules. If people have confidence in the system, know what to expect and feel like they’re being treated fairly, they’ll be more ready to accept market forces. And I think this is where the government can play a role.

We have one of the most advanced systems of selling real estate in the world, but it’s not without its weaknesses. I’ve often thought I’d like to start a real estate system in which things are done right and the highest ethical standards are followed. But no one elected me to do that. So, in the meantime, I’m going to continue doing what I’ve always done: treat my clients like they’re my family, follow The Golden Rule with everyone else and hold myself to the highest ethical and professional standards I can think of. And I’m going to hope everyone else follows along.

If you know anyone who is interested in learning how the market works and would like to receive the kind of help that involves honest answers, straightforward advice, no pressure and being treated like family, please let me know the best way for me to connect with them because I’d like to offer them this kind of help. And as always, don’t be shy if you have any questions or comments about this post! Thanks for reading.

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2 Responses to “What’s Wrong With This Market?”

  1. Brian J April 5, 2017 at 3:20 pm #

    Wonderful article Michael. Bermuda has a protectionist law similar to what you are mentioning and it seems to work.

    • Michael Meltzer April 6, 2017 at 5:01 pm #

      Thanks, Brian. Glad you liked it. And thanks for letting me know about Bermuda. Now that I know it has similar protectionist laws in addition to good weather and plenty of golf courses you’ve really got me thinking.

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