….that is the question!
But perhaps that isn’t the question you should be asking yourself, as a seller, when you’re sitting at the bargaining table at 9:30PM on offer night!
Surely you had already made up your mind…….right?
We are definitely in what I would call a “seller’s market,” but that doesn’t mean that every seller walks away happy.
Some sellers are greedy and some sellers are unlucky.
A couple weeks back, I encountered a seller who was both.
I was showing a house on the east side, listed at $589,000, and before I had even set foot inside the property I told my client “You’re looking at $625,000 here.”
I was right.
Well actually, as the story will eventually explain – I was wrong. But what I mean is that as soon as I walked through the house, I told my buyer “You know how I said you were looking at $625,000? Well I think you might be looking at more.”
The house was a beautiful century-old Victorian on a very sought-after street and it had been converted into a turnkey duplex.
Now consider that most “duplexes” in Toronto consist of a house with a basement apartment. This isn’t a duplex to me or you, but to all the sellers of crappy houses with basement apartments – it is. They list these “duplexes” on MLS and just frustrate the hell out of buyers who are looking for something more “real.”
The propery that my client and I were looking at was just that – a real duplex where the front foyer of the old home had two doors – one leading to a gorgeous second-storey loft, and one leading to a two-level unit with 2-beds and a bath.
On the main floor of the home, there was a very spacious living/dining room with all of the original character and charm of the old Victorian – mouldings, trim, stained glass, and great ceiling height! The floors had been redone, and there was a great kitchen at the back of the house with granite counters, stainless steel appliances, and a great gas range.
The kitchen walked out to a new back deck, and the deck led down to a large stone patio that could comfortably seat 15-20 of your closest friends.
The basement contained two very large bedrooms, and a laundry room that was cleverly built next to the exit so that the second-floor tenant could come around the side of the house, go down the steps, and enter the basement to do laundry without disturbing the main floor tenant.
The 2-bedroom unit on the main/basement level would likely rent for about $2,200.
The second story unit was phenomenal.
This house was a 2 1/2 storey, but the owners opened up the half-storey to the second level to create 16-foot cathedral ceilings! So many Leslieville, Riverdale, and Cabbagetown Victorians have a useless “loft” space on the 1/2 storey that is either a finished space you’d never use, or just a musty attic.
The owner of this duplex created a very unique loft out of the extra 1/2 storey, and this one-bedroom, one-bathroom unit was likely the nicest unit I’d ever seen in a duplex or triplex.
But once I saw the 200 square foot patio at the back of the unit, I was sold!
This unit would likely rent for about $1,500.
So after walking through the property with my client, going over the impeccable home inspection, and looking at comparable sales, I told her that this could likely go for upwards of $640,000.
Offer day came along, and I was surprised to find that there was only one registered offer by 5PM.
My client kept asking about $610,000, and I told her there’s just no way she could get the property for that price.
I’d buy it at that price, and I’m not even in the market!
By 7PM, a second offer had materialized, and we were the third offer.
We went up to $615,000, and I expected to get the “thanks but no thanks” call shortly thereafter.
It took an hour to get a response, and the listing agent said that her seller was “mulling over his options.”
At the time, I made nothing of it. I asked her – did we win, lose or draw? But she just kept saying, “hang tight.”
Something was up, but I wasn’t sure what.
I honestly thought we had no hope in getting this property for $615,000, when on a good day it might sell for $650K.
By about 8:45PM, the listing agent called me and said something that I’ve never heard in all my time in real estate:
“David, thank you so much for your offer. Unfortunately, I think I’ve wasted everybody’s time. Well, my seller has wasted everybody’s time. Yours, mine, everybody’s. He’s not going to accept ANY of the three offers. I’m sorry.”
Huh.
That certainly was a new one!
Now I know what you’re all thinking – that the seller was playing us. Or rather, the agent was.
That thought did pass by me as well.
A few years back, my buddy Dave bought a house on Winnifred where the sellers tried to pull the same stunt. We offered $410,000 and they said they were “expecting” about $440,000, and they were going to re-list the next day at that price.
They were trying to play us, but it was obvious. Not just because the listing agent had been drinking red wine for three hours and her efforts were transparent, but because our offer was irrevocable for about two hours and she was calling me more and more frequently as the expiry approached. They ended up taking our offer, which the listing agent spilled red wine on. My office administrator tried to tell me that it was an “illegal” contract – with the Merlot as evidence of why.
So when I heard this same song and dance two weeks ago, I thought perhaps that could be the case once again. But the listing agent was despondant, and our offer was set to expire at 9PM. I didn’t think she’d try this with about 15 minutes to spare.
The listing agent said her client was on his phone for two hours talking with somebody about his “options,” and ultimately he couldn’t let the house go for $615,000. He was expecting $650,000, or more.
Well, I was right! Somewhat.
I often say, “I don’t mind being wrong, when it suits us,” and predicting a potential $650,000 sale price but being the highest offer at $615,000 is a win-win situation. Unfortunately, the listing agent told us that the seller didn’t want to work with our offer, or any of the offers!
My client was as shocked as I was, but she took it in stride, and I told her “have a good night.”
At about 11:45PM, shortly before my daily dose of Law & Order repeats on Bravo, the listing agent called me back.
I knew what was about to happen, even before it happened.
She told me that after much soul-searching (and a few more phone calls), the seller wanted to work with our offer.
I asked what “work with,” meant, and told her that we weren’t going to add a penny to our offer. She said that was fine, and asked if I could bring the offer back.
Don’t forget – the offer expired at 9PM! So even if the seller wanted to take our offer, he couldn’t! We would have to re-submit!
That’s how I knew it was never a “ploy” and this seller really had no clue whether he wanted to sell or not.
I really can’t say I blame him.
The market is red hot and this house “should” have sold for $25,000 higher. This seller had some awful luck, but his terrible greed almost put him even further behind the eight-ball. If he had re-listed the property at a higher price, he’d scare off any rational buyer who saw the property hit the market the first time.
I had my client re-submit the offer with a 1:00AM irrevocable, and the deal was done just before the deadline.
She got a house for $615,000 that I honestly thought could have sold for $650,000; but one that I know in my heart of hearts is truly “worth” $25,000 more than she paid.
What a deal!
And it almost didn’t happen as the seller was up, down, back, forth, east, and west – all in the space of a few hours.
Perhaps there is a little bit of luck involved in real estate.
I’m just glad my buyer was finally on the receiving end…
Mila
at 8:45 am
You should have come back with 610 the second time around – the seller screwed up the first time (no matter how unlucky they were to begin with). I’m sure they would have accepted that too.
Ralph Cramdown
at 9:08 am
The roof line is sagging. I wonder whether that upper level cathedral ceiling involved an engineer and building permits.
L Dub
at 2:07 pm
the market is red hot to people who have no idea about real estate bubbles, and the idea of a 20 % down payment ..
Kyle
at 3:30 pm
…And the market is always in a bubble, to people who wish they bought, but now can’t afford to.
After a decade of chanting the same thing, when will these bubblist finally admit their wrong? You Garth Turner followers are as bad as the fools that plan their lives around Harold Camping’s end of the world predictions. The Toronto market is balanced, can you get over it and move on with your lives already?
Joe Q.
at 3:39 pm
I seem to recall reading that there is / was a jurisdiction where home sellers could not refuse an offer above the listing price (presumably in single-offer situations).
Vincent
at 7:16 am
And how can the market be balanced when many are priced out?
And there are some who have actually bought and SOLD and actually kept their profits.
Increase in value is nothing until it sits in your bank account or used to invest.
dave
at 8:09 am
Kyle,
You say the “bubblists” have been wrong for the past decade?
I presume you mean in Canada only, and you acknowledge that the bubblists in the majority of the world have been correct?
Perhaps, as you suggest, it is simply different in Canada from the other countries in the world over the centuries.
But throughout history every residential real estate market has inevitably reverted to its long term trend. There is no reputable economist ANYWHERE who has ever put forward any credible argument to support a residential real estate market at a valuation outside the long term trend of 3-4x market.
ps. To be clear, I’m not opposed to someone owning real estate. But if you can’t handle a 25% decrease in the that asset, then you you are overweighted in the RE class.
dave
at 10:22 am
Edit note : In the 2nd last paragraph I meant to write “3-4s avg market price to income”
jeff316
at 11:22 am
Da bulls…da bears…the bubble debate is so worn out and polarized it is ridiculous.
Neither side has any credibility on this anymore – it’s all about their egos.
It’s easy and convenient to predict an eventuality when it is being predicted to occur in the immediate future, over and over and over again. But no one on the ‘bear’ side wants to admit they’ve been wrong about a million times and that the bulls have been correct for almost a decade.
It’s also not hard to observe what’s going on around you and tell the latter group that they’ve been wrong when they’ve made the same prediction a million times. But no one on the ‘bull’ side wants to admit that eventually prices will fall and that when that occurs, the bears will be correct at that moment in time.
Bubble, shmubble. People who bought at the peak want to feel better about their purchases. People who stayed on the sidelines want to rationalize the fact that they waited for something that hasn’t happened. It’s more about emotion than economics.
Prices will eventually fall. It may be a burst, it may be a slide, it may be a slow trickle. And then they will begin trickling upwards again. But those constantly calling for a bubble to pop, and those constantly calling for prices to continue skyrocketing are both full of it. Yawn.
Kyle
at 11:47 am
@ Vincent
There are lots of cities were the majority of people are priced out of ever owning. This is probably more the rule than the exception when it comes to large, global cities.
@ dave
I’m actually talking about the Toronto market, as i believe there is no such thing as a Canadian Real Estate market. And any attempt to treat Canada as a single market would be fool hardy at best. In regards to the 3-4x income argument. I would say Economics is NOT a science, it is based entirely on assumptions that normally do not hold, and is measured with models and stats that suffer from all sorts of mathematical issues.
The main one with your 3-4x rule of thumb is it doesn’t consider the dispersion of incomes at all. Nor does it take into consideration that the dispersion of incomes is totally unstable (i.e. heteroskedastic). Look at a city like New Delhi, the average price of real estate is probably over 100x the average income, does this mean that tomorrow real estate in New Delhi is going to magically revert to 3x. Of course not, it just means real estate is not something the median person will ever own there – so why on earth would you use the median person’s income as an indicator of real estate values.
dave
at 1:03 pm
Kyle,
Your claim that is no such thing as a nationwide real estate market is easily disproved.
Yes, there will be regional differences, but mortgage rates and the effect of the CMHC are nationwide. Further, if there were no correlation between different regional markets then the nationwide melt in many countries would be statistically impossible.
Toronto prices have increased almost lockstep with Canada wide prices over the past 10 yrs. So to be clear, from your post can I infer that you think that Toronto prices are balanced, but Canadian prices are in a bubble.
wrt to New Delhi, you have blended the definitions of average (also called “mean”) and median. These are different terms.
You say that in New Delhi, the average price of real estate is over 100x income? If you can provide your source data for that claim, I can guarantee you (yes, guarantee) that i can demonstrate you (or someone else) has used incorrect data.
Finally, there are numerous examples throughout history of residential RE markets where the price/income ratio has substantially diverged from 3-4x. This can continue for the midterm (10-20 yrs), but eventually over the long term it always reverts to 3-4x.
I’m not saying that one can’t make a lot of speculative profits in an irrational market. Just that one should be prepared for the the irrational market reverts to rational.
Vincent
at 2:19 pm
@ Kyle
I agree, there are many who will never be able to afford a home. I don’t see how Toronto is one of those cities. I don’t see how Toronto is turning into some global city within the past 5 years or so.
Kyle
at 6:06 pm
@ dave
You infer that i think Canada is in a bubble, when in fact i make no claim on Canada as a whole. Like i said, i don’t consider Canada a market. Sure you can calculate all sorts of ratios on the country, but what the hell do you do with that information when you’re done? Say your analysis says Canada is undervalued, are you going to buy a portfolio of properties from every town and city in Canada? To be clear the reason Canada prices are so closely linked with Toronto prices, is that Toronto sales by volume make up a huge proportion of the Canadian sales. Not because of CMHC or common factors.
The crux of my argument was this, your simple application of widget economics, which come from “all else being being constant-ville” and “one time shock-land” does not work in the real world where the distribution of incomes is becoming more leptokurtic (i.e. fatter tails) by the day, because it is the right tail that drives real estate values not the mean, not the median not the mode. So your point on which to use is moot.
As for your 3-4x rule of thumb, explain this:
New Delhi average income = Rs 58,655
http://www.expressindia.com/latest-news/Report-Delhi-has-highest-per-capita-income-in-country/286903/
New Delhi average price per sq ft = Rs 27,637 (this is for apartments for houses it’s actually 3x more expensive):
http://www2.zamanzar.com/New+Delhi/Residential-Property-Prices.html
Lets just say you the average apartment is 500 sq ft in New Delhi, then the average home ratio is 235.6 x the income.
Kyle
at 8:51 am
Once upon a time there was a guy named, Chuck. On Thursday nights Chuck, would wear snug shiny suits, and pointy shoes, and 10 sprays of Drakkar. After 20 minutes of practicing his arched eyebrow squint in the mirror, and delivering his killer line; he was ready to go hit the club like he has every Thursday for the last decade. This time, he felt like it was HIS night. He felt like that moment he knew would happen all this time would finally arrive.
After all he had been following all the advice that his friend Dimitri gave him, right down to the 20 squirts of Drakkar, the squint, and using the “Hey Ladies, why don’t you let me show you a good time tonight?” line. After all Dimitri knew what he was talking about, Dimitri was the man, he even sells books on how to score for $20 a pop.
Unfortunately this Thursday would turn out just like any of the last 520 Thursdays. Chuck got turned down by every single woman in the club. Later that night, Chuck asked Dimitri, “how come it’s not working, i’m doing everything you tell me. I EXPECT IT SHOULD WORK.” Dimitri replied, “it will work one day, there’s nothing wrong with your expectations, it’s the women that are wrong”. Chuck thought about it for a sec and nodded his head and said, “You’re absolutely right Dimitri. I’ve got to go, Drakkars on sale at Costco”.
dave
at 9:01 am
Kyle,
Over the past decade Toronto prices have risen at the same rate as non-Toronto Canadian prices. Further, there is ample evidence from many countries that there are national factors which affect the demand for local real estate.
Your 2nd paragraph points are a little blinkered, but ultimately will only affect short to medium term prices (note that “price” is different from “value”).
New Delhi has a population 4x Toronto, yet the RE listings from the site you posted are 60%. That’s a 7:1 difference. So either the site you posted is not the full market, or home ownership is at 10% (vs 70% in Canada). More likely is a combination of the two.
For the income link you posted, it doesn’t reflect the substantial size of the shadow economy in india.
However , I freely concede that the current ratio for New Delhi is much beyond 3-4x income, but that the same thing holds true for many markets past and present. The topic at hand is not the short to medium term, but rather what will hapen in the long term.
Ultimately, the rationale of the bubblicists for the Toronto market is identical to that applied to the various markets which have recently popped, and to the markets which have popped over the centuries. Those who don’t learn from history will soon repeat it.
ps. The internet is a wonderful place. I did a quick google, and one of the first hits provides absolute proof that aliens exist! http://www.alien-ufo-pictures.com/absolute_proof_aliens_exist.html
Joe Q.
at 9:53 am
@Kyle
“There are lots of cities were the majority of people are priced out of ever owning. This is probably more the rule than the exception when it comes to large, global cities.”
Absolutely true. I think you will also find, though, that these global cities have far lower home-ownership rates than we see in North America, the UK, etc. They simply don’t have the cultural drive towards home-ownership that we have in the English-speaking world.
dave
at 11:57 am
Kyle, loved your analogy. So appropriate in scale and context. Can I try one?
Ok, so 3 guys are sitting around playing Russian roulette.
The first holds the revolver to his temple, pulls the trigger, but no bullet!
They reload the gun, and the second guy does the same, and BAM, his brain is splattered all over the wall.
They reload the gun, and the third guy does the same, and BAM, his brain is also splattered all over the wall.
The first guy reloads, points it to his temple, and pulls the trigger but once again…no bullet.
“This is awesome”, he rejoices, ” …it is clearly different in my chair!!!”. And he happily reloads the gun….
…to be continued…
Kyle
at 2:21 pm
@ dave
What you bubblist don’t understand is that every bullet you guys think you have is actually a dud. I hear people say there is a bubble in T.O. Real Estate all the time, never once has any of them ever been able to provide a convincing argument for why they think so.
Most, like you trot out this old wives tale of a rule of thumb of 3-4x, which i have already proven is bunk, and which by your own admission, doesn’t work if the home ownership rates are low, or could misguide you for periods of up to 10-20 years. That to me that doesn’t sound like a bullet. Infact in terms of predictive power it ranks somewhere below Jo Jo’s Psychic Network. I sure as hell wouldn’t base the purchase of the largest asset in my life on some ridiculous ratio that really only ever worked back in the 50’s when everyone worked for Henry Ford and had COLA contracts.
Just like Chuck and Dimitri, when reality doesn’t equal their expectations, bubblist will claim the market is wrong. What you guys don’t understand is the market can not be wrong! Expectations should be based on the market, don’t for an instance be so naive to think that the market should be based on your expectations, because the market doesn’t give a F’ about your expectations, or anyone’s.
Joe Q.
at 7:01 am
The “3-4x” rule of thumb isn’t really meant to be prescriptive — its value is that it is actually descriptive of housing markets in Canada over the long term. When the market strays too far from this number it tends to snap back into place.
dave
at 8:09 am
Kyle,
If the market can not be wrong, then how did the dot.com crash happen? In any event, let’s agree to disagree
Kyle
at 8:31 am
@ Vincent
Slowly but surely Toronto is becoming a global city. There was a study done showing how Toronto has become a city of rich owners, poor renters and highways clogged with middle class suburban commuters:
http://www.urbancentre.utoronto.ca/pdfs/researchbulletins/RB41Media_Release2.pdf
Aside from this study we are slowly seeing more and more signs of foreign money investing huge sums in Toronto. Some high profile, like the $28M condo sale or the $17.5M house sale on Teddington Park. Other more telling signs are retailers like Walmart, Target, Marshalls & Lord & Taylor coming to Canada. These corporations do not make these decisions willy nilly, they do enormous amounts of research before they move into a new Country. And the fact that they are investing now, even though the exchange rate makes it far more expensive for them to do so, shows they believe the long term prospects are worth it.
One of the most encouraging but lower profile signs that Toronto is rising on the world stage is that China Investment Corporation is setting up offices in Toronto. This is a corporation responsible for managing and investing $332 BILLION in assets.
Toronto is the gateway to Canada, and Canada is the top performing country, to me it makes total sense that Toronto has become a major player.
Kyle
at 10:53 am
@ dave
Thanks again for proving my point. The dot-com crash is precisely an example of the market being correct. It is the participants betting on the wrong side of the market that were wrong, not the market. At any given time the market is the market, it can not be wrong.
Just like the score in a hockey game, it is what it is. Whatever ones expectations, Vancouver did not win. Rational people accept the score for what it is, bubblist instead prefer to delude themselves and call the score Bruin-biased (i.e. like when they say the market is overvalued).
dave
at 9:10 am
Kyle,
Please don’t continue to put words in my mouth
I did not “by my own admission” state that ratio of 3-4x income is bunk
And nobody, including myself, has denied the current state of the market. Nobody has claimed that it is an illusion, or an episode of lost. You’re quibling over the semantics of what “is never wrong” means.
Kyle
at 1:30 pm
@ dave
Please re-read carefully i never said you admitted it to be bunk, in fact i’m well aware of your steadfast denial of the ratio’s obvious bunkness, even after it has been proven. What I did say, is that you admitted that it the ratio can misguide you for periods of 10-20 years. Now just so you don’t think i’m putting words in your mouth again, i have pasted your own words below.
You said, “Finally, there are numerous examples throughout history of residential RE markets where the price/income ratio has substantially diverged from 3-4x. This can continue for the midterm (10-20 yrs)”
wrt Markets never being wrong. It is clear that what i’ve written has gone right over your head. It had absolutley nothing to do with semantics, and everything to do with accepting reality.
I will simplify it for you: Bubblists say, “the market is in a bubble and overvalued”. What this means is that the market is higher than where they expect. Rationale people might conclude their expectations were off, bubblist instead conclude that their expectations (no matter how ill-informed) are correct. And therefore it is the market that has been incorrectly “overvalued” for the last 10 years. Again this is not a question of semantics, this is a question of delusion on the part of bubblists.
Joe Q.
at 6:48 pm
Bubblists say, “the market is in a bubble and overvalued”. What this means is that the market is higher than where they expect.
For people who study the issue, “where they expect” is not some random number pulled out of the sky, but a serious consideration of trends and indicators that have predicted housing values over time.
The Toronto housing market became decoupled from local incomes in the early 2000s. These days the best predictor of house prices is total household debt — graphs of house prices and household debt vs. time line up very nicely. The average house price graph has points of inflection that line up with rule changes from the CMHC (removing of ceiling for mortgage insurance, 0/40 mortgages, etc.).
Cheap and widely available credit is what has made the current Toronto market happen.
Kyle
at 8:25 am
@ Joe Q
While there may be correlation between rising debt and house prices, there certainly isn’t any evidence in the data to conclude that there is a housing bubble. Even if debt continued to rise, the amount of housing leverage would be capped by the max 32% GDS ratio, so unless you have evidence that Canadian banks and lenders are pulling a “Countrywide”, any inference of a housing bubble from such data is a long stretch.
jeff316
at 7:22 pm
@ JoeQ: “Cheap and widely available credit is what has made the current Toronto market happen.”
That’s a big factor – the easiest to point out – but not the only one. There are provincial and local factors as well that are driving prices up too: Collapse of manufacturing economy, public sector employment stability with the city and the province, lack of transit expansion, downtown being back in vogue, immigration/migration, etc.
Easy credit is a facilitator, but there are factors that put more wind in Toronto house price sails than just easy credit.