Have condo prices really gone up 30% in the last three years?

No?  Then why are some sellers pricing their units accordingly?

I know, I know.  “A house is worth what somebody is willing to pay for it.”  Right?

According to this theory, every house or condo is “worth” every price that is paid by the seller.

Ignore emotional purchases, bad advice, agents driving the prices up – none of this matters, if a house is worth whatever somebody is willing to pay!

However, if you flip the equation around, a house or condo is not worth what the seller wants somebody to pay.

If only it worked both ways!  If only every property was worth whatever a seller asked, in addition to whatever a buyer paid!

It seems as though some sellers feel this way, to be honest.

I’m seeing some insane pricing in the condo market these days, and while probably 80% of properties are fairly-priced, and 10% of properties are priced a little optimistically, there are about 10% of all condo listings whose prices are absolutely, positively, insane.

For example…

I was browsing MLS the other day and I saw the new listing for a condo which I had sold a few years back (I represented the seller in 2010, so the buyer to that transaction is now selling).

The price was $619,000, which struck me as a little odd.  The price was high for the product, without me even doing any research.

But then I looked up the 2010 sale in my database, and I was shocked to see that the unit had sold for $489,000.

The unit was not an easy sell in 2010.

The living room window faced a brick wall, which was about 18-feet away (on the other side of an alley), and thus the living, dining, and kitchen were very dark, with no natural light.  The $489,000 price in 2010 was pretty good value for the space, but I always figured, “Whoever buys this is going to have a tough time selling it down the road.”

So imagine my surprise when I see the unit up for $619,000 today?

Do the math, or hold on while I do it for you…

The sellers have listed their condo for $130,000 more than they paid for it three years ago.

That’s a 26.6% increase, in 35 months, or approximately 9% per year.

9%

Has the housing market in Toronto gone up 9%?

No?

What about the condo market?

Here are some numbers for you…

The average price of a house in the GTA in May of 2010 was $446,593.
The average price of a house in the GTA in May of 2013 was $542,174.

That’s a 21% increase over three years, and that’s for ALL property types, in all areas.

Am I splitting hairs here?  Am I complaining about the difference between 26.6% and 21%?

I don’t think so.

I believe that over the past three years, this 21% increase in the price of Toronto properties has been driven by houses, not condos.  Sure, BOTH have increased in price dramatically, but freehold properties have increased at a much greater rate than that of condominiums.  The demand for houses is sky-high, and the supply is only a fraction of what’s demanded.  That’s why prices continue to rise, and we continue to see multiple offers on most single-family homes in good neighborhoods.  The demand for condos is steady, but the supply, however, is equally matched by the demand.

So what is my “gut” feeling on how the condo market has done in the past three years?  I think it’s probably up 12 – 15%.

The funny thing about this is – I’ll have an equal amount of people showing me numbers to justify those 21% and 26% figures (you can make numbers say anything you want!), and I’ll have an equal number of people trying to show me how the condo market is up, maybe, 9% in the past three years.

It’s tough, because the supply keeps changing, and the numbers keep getting skewered.  The influx of “luxury” developments in the last few years has driven the “average” price up further, even though many of those “luxury” condos are worth less today than what was paid for them three years ago.

Bottom line: the condo market is NOT up 26% in the past three years, and this $619,000 condo is insanely over-priced.

But there are two things about this pricing that really bother me:

1) Why $619,000?  Why not $599,000?  I mean, $599,000 is a price that those sellers will NEVER attain, but that’s not the point.  The point is that at $619,000, none of the $500-$600K buyers are seeing that listing.  Buyers search by price ranges, and this property is outside of the range in which it should be priced.  That’s beyond greed on the part of the sellers – it’s just plan illogical.  It’s as if absolutely zero thought went into the pricing process on their part.

2) The identical unit, three floors up, was on the market for $599,000 for 70+ days, before the listing was terminated.  So it’s like the sellers said, “Oh, really?  The same model was on the market at $599,000, for a ridiculous amount of time, didn’t sell, and then was taken off the market?  Okay, well, we want to price higher than that.”

I don’t understand sellers sometimes.

This is rampant over-pricing, and it makes no sense.

The sellers want a $130,000 profit on their slightly above-average condo, inside of three years?

No way.

This property will be reduced to $599,000 in 30 days, then $579,000 in another 30, and it’ll end up selling for $555,000.  That’s a 13.5% return, which is quite reasonable given the condo market in the past three years.

This is just one example of over-pricing, but believe me when I say that I’m seeing this all the time.

I’m a rational, logical guy, but in this business, we meet a host of characters who throw logic out the window.

Imagine this situation: I get a cold-call from a condo-owner who wants to sell her property.  She gives me the address, the floor plan, and everything I need to get a baseline price, and I do my research, work up a very pretty Excel spreadsheet, and show her the findings.  I tell her that her condo is worth about $400,000, give or take, and she may end up with slightly less, but I’ll do my best to get her slightly more.  She smiles, says, “great,” and then adds, “But I’d like to list the condo for $479,900.”

Folks, this happens all the time.

There’s no logic in that, and there’s just no reason.

In my experience, rampant over-pricing exists for three main reasons:

1) What we “need.”

You just can’t price your condo according to what you “need,” no matter what those needs may be.

Hey, look – you need $80,000 for some experimental medical procedure, without which you will forever suffer.  I understand!  But that has no bearing on the market, its participating buyers and sellers, and the fair market value of your property.

“We need to net $800,000 from this property,” I’m often told by people with mortgage money owing, pending transfer costs, and other fees.”  But when I do the math, I’ll often add up that this means their property is over-priced by 15%, and there’s no real logic to the pricing other than what they “need.”

A real estate “need” is essentially a “want,” and a want is driven by greed.

2) Numbers pulled from thin air.

The example I gave above with the $619,000 condo was probably driven by #1 above, but often those insane prices are arrived at by sellers who use numbers they shouldn’t be using.

One of my favorite sayings in the history of modern language is something I over-use on this blog: “You can make numbers say anything you want.”

A seller can use any number to justify his or her desired list price.

For example, say that a certain model of a condo has sold for $405,000, $398,000, $408,000, and $432,000.  The seller might decide that he or she wants to list at $434,900, because they want to “be the new high water mark,” as is often said.  To you or me, that $432,000 sale might look like the outlier of the bunch, and we might assume that it was on a much higher floor, with a better view, substantial upgrades, and maybe some furniture was included in the sale to jack up the list price.  But to the seller, that $432,000 sale represents the bare minimum that he or she would accept.

As we saw at the onset of this post, the appreciation rates for Toronto real estate can be used for both good and evil.  If the average Toronto property increased 45% since you purchased your condo, but your condo is in an ugly 25-year-old building that the buyer pool hates, then maybe you can’t expect that same 45%?  Just maybe?

But try telling that to a seller, and entitlement takes over.  Nobody wants to be labelled “below average,” but consider that an average consists of many numbers, high, medium, and low, and if the average is 45%, then it means somewhere, there’s a property that went up 60%, and somewhere, there’s a property that went up 15%.

Nobody wants to be told that they’re that 15%…

3) Agents buying listings.

Sorry to my colleagues, but we all know this happens.

Reasons #1 and #2 are all the seller’s fault, but quite often, the listing agent is to blame.

If you were a seller, and you interviewed four agents (do people still actually do this though?) and the four agents said they would list your condo for $414,900, $424,900, $419,900, and $449,000, which agent would you hire?

Balk if you want, and say that you’d never be that stupid, but emotions run high when it comes time to sell, and many condo-owners are listing with the agent that quotes the highest price.

We call this “buying the listing.”

Agents routinely buy listings, and it’s for a variety of reasons.  Some agents feel that with a 120-day listing, they can finesse the seller into a series of price reductions.  Other agents just want their sign on the lawn so they can gain a presence in the area.  And other agents want a forum to meet active buyers through open houses and MLS leads.

I blame the agents here, but I also blame the sellers for listening.

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Like I said: about one in ten condo listings in the downtown core right now is comically over-priced, and I’m not sure what’s worse – the sellers who know, or the sellers that don’t…