Just, um, wow.
Really, really insightful discussion on Wednesday’s blog, and some admissions from regular readers that they may have seen the light, or at least, some light.
Comments about the FHSA actually contributing to demand, thereby inflating the price of real estate, are perspectives that I wish certain members of government possessed.
I can’t wait for this election to be over, no matter who wins. I’m just tired of the bullshit. There’s nothing truthful out there. Just a bunch of people vying for office who will say and do anything to get elected.
Let me pick up where I left off on Wednesday…
Topic I Don’t Want To Discuss #4: Banning “Blind Bidding
I did an off-the-record interview with a well-known Toronto reporter earlier this year on the topic of transparency in real estate.
After explaining how all of these ideas are pie-in-the-sky because they’re impossible to implement, oversee, and enforce, he said something that stuck with me:
Don’t let the mechanism get in the way of the desire to fix the problem.
I’m paraphrasing. He was far more eloquent.
But his point was that if there’s a problem, don’t suggest that attempting to fix it is useless because there are no identifiable paths to doing so.
I told him, “Unless you want to turn control of the real estate market over to the federal government, there’s no way in hell to enforce this. Just let the government sell all real property in the country and be done with it.”
A lot of people refer to “the government” as the be-all and end-all of problem-solving, and often include the word should.
“The government should really step in,” they say.
“The government needs to act,” they demand.
“The government needs to fix the housing crisis,” they suggest.
“The government should build a portal for the purchase and sale of real estate, and they can track all bids, and ensure it’s done fairly, and blind bidding doesn’t exist.”
O-kay. I guess.
The question of whether we want the government to control the sale of real estate in this country is the most obvious first query. But as I explained to this reporter in the spring, short of them doing so, there’s no real solution here.
First of all, there are existing logistical issues as far as existing legislation and jurisdiction are concerned.
Under the Real Estate & Business Broker’s Act, it’s currently illegal to disclose the terms and conditions of a competing offer. So the idea of banning blind bidding contradicts existing legislation.
Now, real estate legislation also falls under provincial legislation, and the federal government is trying to skirt that by amending the Canadian Criminal Code, which is federal legislation.
But that aside, I don’t believe that the industry makeup allows for the rollout of such legislation and excessive change, simply because I don’t believe the agents are equipped to adapt, nor are the brokerages, and enforcement and oversight would be impossible.
The irony in all this is that what I just wrote above is going to anger a lot of people! I said that the agents are unable to work within themselves, and if you read between the lines, yes, it’s because I think many agents are completely useless. But for years and years, the public clamoured for different business models. Discount brokerages, cash-back brokerages, and everything under the sun. But it’s these brokerages, and the part-time and half-assed agents that they employ, who are going to be the problem!
On Tuesday, a discount agent faxed an offer to my office. It was half an offer, or 1/4, if you go by the forms he included. No name, no contact info, and he didn’t register. I couldn’t find him on TRREB. I had to call his brokerage to track him down (switchboard in Sudbury, probably…). They had no cell phone for him – only email. His email was a Hotmail address. I emailed him and got no response. I paged him through his office and got no response. We sold the property tonight (I came back to this blog Tuesday night, as you may have guessed), and I never heard from this person at all. What the hell is that?
That is the service that some buyers covet. Maybe this agent gives cash-back, who knows. But how the hell do you get agents like that to abide by sweeping legislation?
Don’t let the mechanism get in the way of the desire to fix the problem.
Good point, I know, I know.
Blaming agents isn’t going to win me any fans in this argument, I know.
But just thinking about the logistics of this is enough to tie me in knots.
Let’s say we have a listing for $499,900 and there are four people that want to make offers.
If the offers are not going to be blind, then who goes first? Jayden, Kayden, Brayden, or Graydon?
If Graydon submits a bid for $540,000, then Jayden, Kayden, and Brayden, can make their bids knowing what one offer is, provided the listing agent tells them. So it’s sort of blind, right?
But it was totally blind to Graydon! Is that fair?
Alright, so unless we’re going to trip over ourselves here, we can all agree that we’re talking about “eliminating blind bidding” after initial bids have been submitted?
Bids come in as follows:
First, we ask, “should ‘the government’ mandate that the agents pick the highest offer and not send anybody back to increase, or ask them if they’d like to?”
I think not. I think that’s another conversation about “fairness” but it’s naive and only exists in a vacuum, in a utopia.
So the listing agent tells all four bidders what the other bids were.
Now, it’s no longer blind.
Now, all four bidders can bid while seeing with both eyes, and we have eliminated blind bidding! Yay!
But now what do we do?
Graydon re-submits at $551,001.
Then Brayden re-submits at $551,002.
And this goes on, $1 at a time, for twenty-six days.
Is that the solution?
Okay, okay. I’m being silly, right?
We simply mandate a minimum bid increase.
But who does that?
“The government,” right?
So minimum bid increments are $1,000.
Now it should only take a week for this to end.
Fine. Minimum bid increments are $10,000. Does that make sense? Yes? No? WHO KNOWS!
What about a time limit? Who decides that?
What about the medium? How are these offers submitted? Surely we can’t go back and forth through PDF’s and emails, right? Even with a minimum bid increment and a time limit, people would have to drop everything for ten hours and sit next to their laptops with DocuSign open.
Okay, so we hire an auctioneer! Won’t that be fun! And he’s a government employee, of course, handsomely compensated. In fact, this is a way to create another 100,000 public sector jobs!
So now an auctioneer shows up, and it’s all done in person.
But what if the buyers can’t make it in person? What if there’s a worldwide pandemic and we shouldn’t be crowding into a room or onto a lawn?
“Shut up! Just end blind bidding!” say the masses who don’t want to hear this from me.
But logistically, the idea of transparency is not so simple. It’s actually exceptionally complicated and unless we’re sitting in front of computers, bidding like eBay, it’s not possible.
So then that’s the solution! “The government” can design a failproof software, which will be implemented by Marshal Law, and created by a friend of somebody in government who wins the $54 Million bid without sending it out to tender. Then we can create another 10,000 jobs to oversee the software.
I think what we all want is to eliminate the situation where the buyer with the highest offer is asked, “Do you want to improve,” when he or she is already at the top. Now, consider that if this buyer says “No,” and the second-highest bidder leapfrogs him, then that first buyer loses. So this isn’t always done out of greed and evil, but rather necessity.
So then what we want is to eliminate the situation where there were four offers, three of the buyers have their final bids submitted, and the buyer with the highest bid is told by the listing agent, “You need to improve your price or you’re going to lose.”
Fine. It shouldn’t happen, it’s immoral and should be illegal, so then “ban” that.
But the idea of “banning blind bidding” is something entirely different and it can’t be done with a magic wand and a “POOF” without leaving a house-fire behind. “Banning blind bidding” is a sound-byte for an election. It’s voter candy. Do you really think that Justin Trudeau, who’s been trumpeting this idea, has any idea as to the inner workings of the real estate industry? Or what the process of selling a home in multiple offers is like? How much thought went into this election promise?
This is the season where politicians stand up and say anything to get voters on their side.
I’m all in favour of reforming the offer process, but it’s not to be done with one quick-quip at a podium during an election stop.
Murtaza Haider and Stephen Moranis recently wrote this in the Financial Post:
They said it best in the very last paragraph:
For bidding to be fair and transparent, provincial legislation must be amended. But the federal government should help initiate an informed stakeholder dialogue without having to amend the Criminal Code to ban blind bidding.
Topic I Don’t Want To Discuss #5: Inflation
Let’s say you’re an average Canadian.
You’re scrolling on your phone and there are five different headlines.
Which one do you click:
1) “What The Future Of Bond Movies Could Look Like”
2) “Blue Jays Ready For Playoff Push”
3) “Inflation Rate Rises To 4.1%”
4) “Kendall Jenner Discusses How She Found Out About Kylie’s Pregnancy”
5) “Ontario Reports 864 New Coronavirus Cases”
I have to think that a story about inflation is dead-last.
I like talking about inflation but that’s because I’m genuinely interested in economics and because the industry in which I work is affected by the rate of inflation.
But does the average Canadian give a hoot about inflation?
Does the average Canadian even care?
With the rate of inflation in Canada now sitting at a whopping 4.1%, it’s a genuine concern, but a concern that many don’t have. Simply put, it’s a boring topic and one that many don’t understand. It’s also unsexy. And when it comes to election topics, “inflation” isn’t nearly as interesting nor do as many people feel a direct connection as they would if they talked about free dental care.
Inflation is something that affects every single one of us, but since we don’t see a direct connection to it, we often overlook it.
But many of us understand the dangers of inflation, and that, combined with the “head in the sand” mentality of a large percentage of the population, is why it bothers me so much.
We talk ad nausem about rising house prices and yet there are still market bears out there. So how in the world do we expect house prices to remain the same, let alone decline, with an inflation rate of 4.1%?
And if a property owner saw a 5% year-over-year return on his or her house or condo, would that person factor in that 4.1% rate of inflation?
For those with their money stuffed in their mattress, they are 4.1% poorer than they were last year.
So from here, the natural discussion goes, “Shouldn’t we expect interest rates to rise as a result of inflation?”
Yes, we should.
And if interest rates rise, then housing affordability falls.
Theoretically, at least, prices do too.
But does anybody really think interest rates are going to rise in this economy?
And does anybody really think that housing affordability will fall, and thus prices will too?
There’s so much theory in all of this and when it doesn’t match up with what’s happening in practice, it can be frustrating.
But we’ve seen theory differ from reality before many times. We used to look at the “ratio of wage growth to housing growth” as a metric that could predict future housing patterns, but the theory, that this ratio increasing means prices will fall, was the complete opposite of what happened in Canada. It was flawed. It ignored the redistribution of income from baby-boomers to their children, and even as wages grew at a fractional pace compared to growth in housing prices, those prices continued to rise.
Inflation is on of those topics that I just can’t stomach right now because so few people care and those that do care have absolutely no idea what it means, myself included. Go ahead, try to predict the future. Just be sure to come back here in two years for the follow-up…
Topic I Don’t Want To Discuss #6: Municipal Development Charges
You would agree that $750,000 for a condominium is a lot, right?
Sorry, that’s vague. This could be a 3-bedroom or it could be a 1-bedroom, but let’s just say that to get this condo for a lower price would be nice, right?
So let’s say that in 2019, a pre-construction condominium sold for $750,000. How much of this do you think goes back to the government for various development charges?
Just guess, please.
A few thousand?
Tens of thousands?
How about $164,500?
Two weeks ago, I read this article in the Financial Post:
I’ll freely admit that my take-aways from this article had less to do with green buildings and more to do with development charges in general.
We talk a lot about pre-construction condo prices and how utterly ridiculous they are, but maybe what we don’t talk about often enough is the cost of land, the cost of construction, and the municipal development charges.
You would be absolutely sick if you knew how much money the City of Toronto rakes in from these charges.
From the article:
In Toronto, 22 per cent of the cost of new condominiums goes to government charges, up from 18.7 per cent in 2013. In Brampton and Markham, these charges account for up to 30 per cent of the cost of a new home. At 16.3 per cent, Bradford represents the low end in Ontario.
What that means is that government charges constituted $164,500 of the purchase price of a $750,000 Toronto condo in 2019. The same amount is built into new home purchases in Markham, but on a lesser purchase price of $532,000.
Now consider the HST that the federal government charges on new condominiums, which is built into the purchase price.
Now consider the land transfer tax applied on the purchase which the buyer pays to the City of Toronto and the Province of Ontario.
Suddenly, it’s not developers and real estate agents that are “driving up the price of real estate” now is it?
I’ve mentioned in the past, and I have a future blog post in the queue, about a land assembly I completed for a new condominium off Yonge Street that was crushed by a Toronto City Councilor. If this project is ever revived it will only be because the City was able to squeeze more from the developer. More fees, more charges, more benefits to the city. And all that does is drive up the cost for the end-consumer.
The only contrarian argument here is something wild-eyed like, “Developers should just accept less profit,” or perhaps that they should turn just their businesses into non-profits. But I know you read what I posted above – that $164,500 of a $750,000 pre-construction condo purchase goes to the City of Toronto. I know you saw that and I know you can’t ignore it.
So the next time you want to lament the cost of housing in this city, perhaps try looking in a new direction…
That’s it for me, folks!
What a week!
I don’t have a topic for Monday yet, so I’m open to suggestions…