We had just finished representing our respective buyer clients in a multiple offer situation which resulted in the sellers receiving a jaw dropping, unjustifiably high price when my Realtor friend asked me “What is happening in this market, Michael?” I’m not sure she expected an answer because I don’t think anyone really knows what’s happening, but she got me to thinking and I came up with a few theories.

You’ll need to know the background before you can understand why she asked me this question. Our clients were interested in a home that was priced at $1,200,000 (or thereabouts). The highest price paid for a similar home had been $1,400,000. There were more offers than I have fingers and this home ended up selling for $1,600,000.

Now, when I have clients interested in making an offer on a home, any home, we always discuss the comparable sales to get an idea of what the home might sell for. In this case, the comparable sales were between $1,200,000 and $1,400,000. There wasn’t a single comparable above $1,400,000 let alone close to $1,600,000. And yet someone still paid $1,600,000 for this home. This isn’t an isolated incident. Some buyers have been paying several hundred thousand dollars more than the top price someone would expect a home to sell for. We haven’t seen such uncontrolled and factually unsupportable spending before in central Toronto, but it’s been happening here and there, and with increasing frequency, for the past couple months or so. So why has this been happening?

[First, a short sidebar: These sellers refused to consider Bully Offers. They could have easily done so, but they decided on a process and wanted it conducted with integrity. I thank them and congratulate them. You don’t need Bully Offers to achieve a phenomenal result.]

The simple reason as to why we’ve been seeing some absolutely unsupportable sale prices is because demand is so much stronger than supply. But that’s a copout explanation. Let’s dig a little deeper. I have three theories as to why this has been happening with the third one being the one I think carries the most weight:

1. Foreign investors: I can’t vouch for this personally because I haven’t been working with foreign investors, but I’ve heard enough stories about buyers from a few other countries being willing to pay inflated prices just to get their money out and park it in our relatively safe and relatively inexpensive backyards (literally) to think that these stories must be at least partially true. In these cases, paying a premium for a home is a price they’re willing to pay to accomplish their larger goal.
2. Lack of due diligence: In some cases, it could be that buyers or the people giving them advice don’t do their homework and/or just aren’t familiar with the central Toronto market. As an example, they might look at a 50’ lot that sold on Alexandra for $3,000,000 and think they should offer $3,000,000 for the 50’ lot that just came on the market on Glengrove. But Alexandra and Glengrove, while very close to each other, are almost different markets. Similarly, a detached, two storey, 3 bedroom home on a 20’ x 120’ lot on Woburn or Bedford Park is not in the same price bracket as a detached, two storey, 3 bedroom home on a 25’ x 150’ lot on St. Germain.
3. Frustrated buyers and super motivated buyers: Here’s what I think is really happening. Supply has been tight for many years now. It can take a long time to find a home. Many of the people who are buying today have been looking for new homes for 6 months or a year or even longer. They’ve probably lost out in one or more bidding wars and may have been scooped by a Bully Offer or two. Most of these people are level headed individuals who realize they’ll have to pay a premium for their new homes. Let’s say 90% of buyers are like this. But the other 10% are different. They’re desperate. They’ve already been through at least one spring or fall market, can’t bear the thought of going through another market without getting a home and now just want to get a home no matter the cost so they can get on with their lives. That’s why we see some unsupportable prices.

When a new market starts and homes start to appear, this 10% jumps all over them right away, seemingly throwing thousand dollar bills at them as freely as they’d throw confetti at a wedding. Sometimes, once this 10% is satisfied, the market returns to a somewhat more normal state because it’s the 90% of level headed buyers who remain. That’s not to say that it’s not still a sellers’ market or that prices haven’t increased. It’s still usually a sellers’ market and prices have usually increased, although not to the full extent of the unsupportable prices. But sometimes the 10% is too large for the number of homes coming on the market and the craziness continues.

Keep in mind that the number of buyers in the 10% is limited by their finances. In many cases, homes which sell for theses unsupportable prices appraise for less than their sale prices so the amount of mortgage money available from a bank is limited. Buyers of these homes must then have sufficient cash on hand to make up the shortfall or be able to borrow from a third party. Most buyers are not in this position and therefore can’t afford to pay an unsupportable price. (We’ll look at homes which don’t appraise in an upcoming post.)

The big question is this: Will there be enough new homes to satiate the 10% and get them out of the market so that the 90% can prevail or will there not be enough homes to satiate the 10% so that eventually the 90% become increasingly desperate and join the ranks of the 10%?  In most past years, the market has found a new level of normal once the majority of 10% has been satiated, but every year is different and only time will tell what will happen this year. Even if most of the 10% is satiated, we’ll still see some unsupportable prices, but because the level headed buyers aren’t willing to pay those prices, we won’t see as many. Only time will tell.

If you know anyone who’s interested in learning how the market works and who’d 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.