It’s no secret that housing prices in central Toronto have been on the rise for almost 20 years now, but how does this happen? One answer could be that it’s magic. A more accurate answer would be that it’s the result of supply and demand. But what about the nuts and bolts of how it actually happens? What are buyers and sellers thinking and doing that’s been causing prices to rise? An understanding of market psychology is often helpful if you’re thinking of buying or selling.

The best way to understand what’s been going on is by way of an example. Hypothetically speaking, let’s say that 4 bungalows sold in North Toronto for between $900,000 and $1,000,000 in the Fall of 2014. Since fair market value is usually determined by the sale prices of comparable properties (called “the comps” by those in the know), buyers who were looking for bungalows and sellers who were selling bungalows all knew that the going price for a bungalow was between $900,000 and $1,000,000.

When the Fall market started to wind down at the end of November, sellers stopped listing their homes, but there were still plenty of buyers around. Unfortunately, they had nothing to buy in December or January. By the time February 2015 rolled around, these buyers were starting to feel a little desperate.

When the Smiths listed their bungalow in February, the Fletchers got excited and paid $1,050,000 for it. Not because it was any better than the bungalows that sold for $900,000 to $1,000,000 in the Fall, but because the Fletchers were a little desperate. This could have been for one of several reasons:

• They might have offered unsuccessfully on several bungalows in the Fall and got tired of losing so they decided to pay a little more than fair market value to finally secure the home of their dreams.
• They might have sold their condo in the Fall and really needed a new place to live.
• They might have been moving to Toronto from Manhattan and figured that $1,050,000 for an actual house was cheap, especially since they would be converting USD to pay for it.

Regardless of their reason for paying $1,050,000, the Fletchers set a new benchmark. Now that the Joneses are getting ready to sell their bungalow, they’re probably thinking “Hmmm, we know that most bungalows have sold for less, but the Smiths down the road got $1,050,000 for their bungalow and ours is every bit as good so who’s to say that there isn’t another buyer out there willing to pay us a similar price?”. They now have increased expectations and will try to get $1,050,000 for their bungalow, too. Other buyers will look at the Fletcher sale and think “Oh no! It looks like we may now have to pay $1,050,000 for a bungalow.”

If the Joneses sell their bungalow for between $900,000 and $1,000,000, the Fletchers’ sale price will be looked at as an anomaly. But if they sell their bungalow for between $1,000,000 and $1,100,000 to another desperate buyer and perhaps a couple other bungalows also sell in the $1,000,000 to $1,100,000 price range, this would be evidence of a new trend and a price increase that buyers and sellers will take note of. Sellers will now expect to sell their bungalows for between $1,000,000 and $1,100,000 and buyers will know that this is the new going price for a bungalow. All of a sudden, the price of a bungalow has jumped by approximately $100,000.

This doesn’t occur across all types of homes in all neighbourhoods of Toronto at the same time. It happens at different times, but it does happen (with a few exceptions). That’s why the prices of some home types and of some neighbourhoods seem to jump all of a sudden.

When you’re analyzing the market, remember that it’s important to know the difference between a trend and an anomaly. Also keep in mind that if you’re buying a home and think that it won’t cause any harm for you to throw an offer in on any home you like, think again. Let’s say your offer for $1,000,000 is the 5^th offer on a home. The ultimate buyers are offering $1,100,000, but will increase their offer to $1,200,000 if there are 5 offers or more because they really want this house. By submitting your offer for $1,000,000, you’ve helped boost the sale price of the home by $100,000 and possibly the fair market value of that type of home which will mean that you’ll have to pay more when you find a home you want to buy.

So there you have it: the nuts and bolts of how prices rise in central Toronto. It never hurts to understand how the market works so add this to your database of knowledge. And if you know of anyone who’s looking for an honest realtor who really knows his stuff and doesn’t pressure his clients, Please Don’t Keep Me a Secret. I really appreciate your referrals. Thanks for reading and don’t be shy if you have any questions or comments!