What I'm seeing in early on-the-ground signs that won't show up in the data until later.
The incredible demand that has pushed Toronto area home prices up more than 30% over last year seems unstoppable on paper, but on the ground, it is showing some early signs of easing up.
On Twitter, fellow industry watchers and I have been discussing some of these early signs of a slow down over the past few weeks. Notably, Twitter has become the source for real time on the ground insights about the housing market, months before these trends show up in the aggregate data.
I’ll start by saying that one of the challenges of discussing early signs of a slowdown is that home buyers and housing analysts alike will often be puzzled because they usually don’t see any signs of a slowdown. The buyer still competing against 20 other buyers to bid on a home certainly sees no sign of a slowdown and the housing analyst will not yet see a single metric in this report that suggests that things are starting to slow down.
So I’ll try to unpack what I’m seeing in spite of the figures.
Firstly, the earliest signs of a slow down are a decline in the number of buyers viewing homes and a decline in the number of offers a seller receives on their offer night, trends which are observed by participants in the market rather than in the data. Every week, I meet with my agents to discuss the real time trends we are seeing on the ground — by mid-February, we all started to see early signs of these trends (e.g., fewer showings, fewer offers, etc.) and we felt the market was likely going to cool down earlier than we originally thought (normally, the market usually remains competitive until the end of spring).
We have also started to see an increase in sellers willing to take pre-emptive or “bully offers” ahead of their scheduled offer night, something that some agents mistakenly view as a sign that the market is heating up.
An increase in sellers willing to accept pre-emptive offers happens due to the information asymmetry between buyers and sellers. A seller’s decision to accept a pre-emptive offer is largely a function of two factors — the price offered and the number of showings they have booked.
A seller is unlikely to accept a pre-emptive offer of a good, but not great price (i.e., over asking price but not overwhelmingly so) when they have 70 showings scheduled — with such strong buyer interest in their home, why forgo the chance of their offer night bringing in even more potentially lucrative offers? But if the seller only has 10 showings scheduled when that same pre-emptive offer comes in, they may be more interested as buyer interest has not been as strong.
This information is ‘asymmetric’ because sellers know how many people have viewed their home while buyers don't, so buyers making pre-emptive offers are bidding with the assumption that the home is getting a lot of showings and will receive 10+ offers on their offer night (i.e., one normally wouldn’t aggressively offer a good price unless this assumption is in place).
The increase in winning pre-emptive offers is partly why the share of homes selling for over the asking price have increased this month — even though I’m arguing that things are actually cooling, because the fact that sellers are accepting these offers suggesting they are seeing something on the ground, like fewer showings, that are making these offers more attractive to them.
The other trend we see is an increase in the number of homes that fail to sell on their offer night.
Normally, when sellers list their home for sale expecting to receive multiple offers, they usually set the asking price well below the market value to attract more buyers. The eventual sale price is typically 5-20% over the asking price, but closer to the actual market value of homes (based on how comparable homes have recently sold).
When a home fails to sell on the seller’s offer night, the seller will typically increase their asking price to one that they are prepared to accept (i.e., as mentioned, closer to actual market value). In early February, roughly 5% of homes with offer nights failed to sell which required them to increase their asking price. By the end of the month that increased to 10%. This is still a relatively small number of failed offer nights, but it’s a noteworthy change.
A few weeks does not make a trend, but I do suspect this change will continue in the months ahead. The combination of buyer fatigue, high prices and rising rates along with inflation and the macroeconomic risks ahead should contribute to a gradual slowdown in the market.
Buyers will want to keep a close eye on these dynamics because they may find themselves buying a home in a very competitive market only to find that they need to sell their current home in a much softer market.
Timing, more than ever, will be everything.
John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.
A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).