Why Have Prices Increased?

Without a doubt, the question I get asked most often is How’s the market? This question can mean many different things, depending on what the person asking the question has in mind. It can mean How much is my house worth? or Is it a good time to sell? It might be a reference to houses or condos, North Toronto or Lawrence Park or the spring or summer markets. There are many aspects to the real estate market, but one thing has been more or less constant in central Toronto since 1997 – prices have been increasing (except for the period between the fall of 2008 and spring of 2009 when they decreased by approximately 10-15%). Why has this happened? Economics 101 – demand has exceeded supply. This edition of the newsletter will examine a few different aspects of this demand to provide you with a better understanding of why prices have increased and a better idea of where the market might go.

The Information Age: With modern technology, members of the public are able to look at homes and examine real estate data online. Because of the information people can now access, at times it seems as though everyone thinks they’re a real estate expert. The problem is that while many have access to the information, very few know how to analyze and interpret it correctly. This makes me think that it might be more accurate to say that we’re living in The Age of Misinformation. When I see a sale price that is unusually high, it’s not uncommon to note that the buyer either wasn’t represented by his or her own
agent or was represented by an agent who has not done much work in the area. Without expert advice, there are a lot of people making uninformed decisions which can lead to higher prices. Tip: Get real expert advice unless you’re really an expert or have money to burn.

Not just an expert, a REAL expert: Going online makes it much easier for realtors to look at homes in parts of the city in which they wouldn’t normally work. Without expertise in a particular area, it’s easy to misjudge values and counsel your client to pay too much for a home. It’s also easy for agents to get caught up in the moment and encourage their clients to pay too much for a home when in a bidding war. Your agent’s advice might affect
the price you pay, which affects the market as a whole. Tip: Choose your agent carefully.

There’s no time like the present: The Now Generation is now here. Most everybody seems to want everything as soon as possible because we’re all extremely busy. Many buyers are willing to pay premiums for homes that are already renovated so they can move in without doing any work themselves (even if this means paying an extra $50,000 for a renovation that would cost $25,000 to do) or are willing to buy homes that don’t really fit
their criteria because they’re tired of looking. I suppose their rationale is that time is money, but this type of thinking can lead to higher prices. Tips: If you’re selling, modernize and prepare your home as much as possible (staging needn’t be expensive and can work wonders). If you’re buying, good things come to those that wait.

More renovations: Almost every agent in central Toronto will tell you that they would love to see more homes for sale because they have more buyers than sellers. Unfortunately, it doesn’t appear that supply will increase any time soon. In fact, I believe supply will start to decrease even further over the next few years because of a trend towards renovating more and moving less. Renovating is expensive and disruptive, but so is moving. If you love your location, why change it? Just keep your location and upgrade your home. As a result, supply may actually begin to decrease relative to the present demand, which will put even more upward pressure on prices. Tip: Be prepared to move quickly when you find the right home because it may be a while before you see something similar.

Misleading media reports: On Thursday, August 4, 2011, one of the headlines on the front page of the Globe and Mail read “Cooling home prices stoke fears amid economic recovery”. On that night, Corinne was involved in a multiple offer situation with 15 offers. The ensuing article went on to mention, amongst other things, that “the number sold dropped 21 per cent in July from June, and prices edged 0.1 percent lower”. This journalist must never have heard of the summer market because this is what happens almost every year. It seems as though the media states that the market is cooling or the bubble is bursting several times a year, when, in my opinion as someone who is in the market every
day, the market has only cooled once during the past 14 years. Still, there are those who base their decisions on this type of information, which explains why some prices don’t make sense. Tip: Don’t believe everything you read.

Low interest rates: There isn’t really much to say about low interest rates, other than that they’ve added fuel to the fire created by the other factors that have stimulated demand and influenced prices. It looks like interest rates will remain low for the next while, but even if they rise, chances are they won’t increase enough to put a damper on the market. Tips: Don’t panic if rates do increase because even if they increase several points, they’ll still be extremely low from a historical point of view. Don’t overextend yourself because these rates won’t be here forever.

The future: As I write this, it’s early August and the stock markets are in turmoil. I still haven’t found a crystal ball that’s 100% accurate, but we’ve gone through economic crises several times over the past 14 years and the only time the real estate market in central Toronto has been significantly affected was in late 2008, early 2009, as mentioned above. I don’t expect the market to slow down or prices to decrease in the near future, even in the face of the current turmoil.  There’s just too much demand, coming from many different sources, for homes in central Toronto. I expect a strong fall market. If I’m wrong and the market does slow down, I doubt that prices will fall more than the 10-15% they fell in 2008-2009, as, once again, there’s just too much demand supporting the residential real estate market. At the end of the day, people always need a place to live.

At least in part because of the manner in which the above factors have stimulated demand, prices now vary much more than they used to and have become much less predictable. For
example, virtually all semi-detached homes in North Toronto used to sell within a $10,000 range, more or less, but their prices may now vary by as much as $100,000. This unpredictability makes it more difficult to make informed decisions. How can you determine the amount to spend on your new home when the price of your current home can vary so much? This brings me back to the first tip – get real expert advice.

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