There’s no doubt about it – real estate is stressful.  Whether it’s buying or selling, the process of moving is often ranked as one of the most stressful life events a person can experience.

It’s a fact that we’re well aware of on our team.  There is a famous poster from 1939 that the British government produced in preparation for the Second World War.  Here it is.

The purpose of the poster was to strengthen morale amongst the British populace in the event of a wartime disaster such as mass bombings.

In the last number of years, it’s been turned into a meme where people take the poster or the saying and adjust it a bit.  Here is our new favourite version!

While difficulties in finding a new home is naturally stressful, the feeling of having your home for sale and not getting offers is incredibly stressful.  After all, so many things that come next depend on the result of the sale, and your life is literally put on hold during the listing process.

We’ve helped many seller clients steer their way through a sale process that doesn’t move as quickly as hoped – and we’ve also seen lots of listing agents fumble the ball and inadvertently cause things to be even worse for their seller clients.

Here’s the three things that can totally derail a listing and how we help make sure our seller clients are able to recover and get the property sold!

Disaster #1 – A good comparable sells for less than expected.

There is nothing as frustrating as having a property that is a good comparable (in terms of location and attributes) sell for less than expected.

This happens more often than we would like, as inexperienced agents or anxious sellers accept an offer that is far less than what they could have received with proper negotiations.

When this happens, every agent that has an interested client brings up that property in the negotiations, attempting to sway our client into accepting a lower price.

We cannot change the fact that another seller took a price that reflects poorly on our listing, but we can control our response.

First and foremost, we refuse to be anchored by the sale price of this comparable.  In negotiating, the term anchoring refers to when a number acts as anchor, influencing subsequent judgments and decisions throughout the negotiation, even if it’s arbitrary.  The buyer and their agent have been anchored by this price and are attempting to convince our seller that their value needs to be reevaluated based on the other sale.

In a situation like this, we believe that as your listing agent we need to be specific and aggressive in our response.  By using specific details about that listing (square footage, lot size, number of bedrooms, bathrooms, layout, finishes, parking and so on), we counter the assumption that the property sold at a reasonable price and can be used as a comparable to our property.

We are aggressive in making it clear to potential purchasers of our property that either the seller of that comparable was desperate or their listing agent did a poor job for their client.  Regardless of the reason, we aren’t going to make the same mistake.  While that can be challenging, remember that a major part of negotiating is holding your stance and being willing to walk away from a deal that is unfavourable.

Disaster #2 – The market doesn’t agree with our price.

There are a large number of factors that go into deciding upon a listing price for a property.

The detailed work up we do when helping a client decide on their listing price looks at a number of different factors, including market changes, comparable properties (for sale and recently sold), MPAC property assessments and more.

This analysis allows our client and us to decide on our listing strategy.  We develop a story and rationale that supports the sale price we hope to achieve and then we communicate effectively to prospective buyers and their agents.  While this can be very useful during negotiations, in some cases, the market doesn’t agree with our price and we receive fewer showings than expected or no offers.

In a situation like this, some sellers panic and lower the price too much, or accept a low ball offer that is below the actual value of the home.  We would say that when a listing isn’t selling, the way your agent reacts is critical to the eventual result.

First and foremost, it is important to present a calm façade to buyers and their agents.  It is naturally the job of a buyer’s agent to push for the best possible price for their client and when a listing isn’t selling, it is not uncommon for agents to try to get a tremendous deal for their clients.  We regularly encounter situations where a low-ball offer is made that should not be accepted by our seller clients.  While the final decision is always that of our client, we believe it is our job to say when we can do better than an offer that is just too low.  It seems like more and more listing agents tell their client it is up to them to accept or reject an offer, and completely skip the stage of negotiating for a better deal or offering additional information for the seller to consider.

Regardless of the urgency of the situation for our seller client, our job is to strike a balance between willingness to be reasonable and comfort with waiting until the right buyer comes along.  A big part of that conversation is helping our seller understand the financial implications of selling now versus later.  In some cases, accepting a lower price makes sense due to additional costs related to financing or carrying costs.  In other situations, a seller could hold on for a number of months before they would come close to incurring costs equal to the “loss” from taking a low-ball offer.

Make no mistake, it is a challenging situation when the market doesn’t agree with the price and value we’ve determined for a client’s home.  When it happens, you need agents who know how to adapt to the circumstances without giving up on still getting you the best possible sale price.

Disaster # 3 – Something unexpected happens externally, that changes the market.

The third situation that can take place is an unexpected external change that impacts the real estate market.  Some examples can be:

• Extreme weather events, such as an ice storm, tornado or even extreme heat warnings.
• Regulatory changes, such as the changes to mortgage rules, capital gains structure and so forth.
• Economic crisis, whether local or broader, that impacts buyer confidence, such as the closing of a major company in a smaller market, international tariffs, interest rate movement, etc.

Generally speaking, we can’t predict these events and they can certainly impact the number of showings or offers.  In situations like this, we need to assess the length of the impact.

• If it is short-term like a weather event, we can stay the course and understand it will take a bit longer to sell. The market returns to normal after thing stabilize, and people have the ability and time to look for homes again.
• If it is more than short-term, such as regulatory changes, it might be worth terminating the listing and waiting a few weeks or month to relist. Typically, such changes impact the market for a 4 to 6 week period before things settle down and continue in a more typical fashion.
• For longer term impacts, such an economic crisis, the decision needs to be made if our client can hold on for a longer time period, or if we are willing to adjust the price quickly to get out before more sellers decide to do so and the market drops.

When there are sudden, unexpected events that impact a sizeable number of people who may have been considering buying or selling properties, the assumptions and normal activity within the market get upended.  While we can’t predict when these take place, it is important to assess them quickly and decide on the approach that works for our seller clients.

Regardless of which of the above situations take place, it is important for you to keep calm and carry on with a reasonable strategy.  If you’re thinking about selling and you want to minimize stress while getting the best result, then get in touch with us to discuss next steps!

While real estate is often focused on numbers and statistics, we can’t forget that it is about people, and people often frame their realities using stories.  As such, we wanted to talk about the story for homeowners in the last little while and what the next chapter will look like given all the recent changes.  Grab a mug of hot chocolate and settle in for the story.

Once upon a time, someone bought a home.

This story should be familiar to you, either because something very similar happened to you, or to people you know.

The story starts with someone buying a home.  They save up a down payment, they work with a trusted Realtor to find, negotiate and close on the home and the happy day arrives when they are given the keys and settle into their new home.

Over a period of time, they live their lives in the new home, all the while, making their mortgage payments and not really paying a lot of attention to what’s going on in the real estate market.  While it can be all-consuming when you’re looking to buy a place, once you own your new home, your interest in the latest listings and forecasts naturally wanes.

Eventually the day arrives when they discover that the home no longer suits their needs.  Maybe they’ve had a life change with the arrival (or loss) of family members, perhaps they need more (or less) space, or their work situation could have changed and with it, where they want or need to live.

As they begin to assess options, a very important question is raised – how much can they spend on their next home?  While income, credit scores, interest rates and other aspects will impact how much of a mortgage they can be approved for now, we’re often involved to help determine the value of their current home.

For the last 20 odd years (depending on which dataset you look at), the story for home owners has been a positive one, with price appreciation.  In addition, for the last 12 years or so, mortgage rates have been at or near historic lows, which means homeowners paid less interest and paid down more principal.

Combine the two and if you or someone you know has bought and financed a home in the GTA in the past dozen years, this is what happened.

1. The value of your home has increased considerably as the real estate market went up.
2. The equity in your home increased as well due to your mortgage payments including significant principal repayments.

When the time came to consider a new home, you found that not only was your home worth a lot more than what you paid for it years ago, you also had a much smaller mortgage than when you bought it.  Hurray!

The combination of these two factors led to home owners being able to move up the property ladder.  While not all homeowners saw the exact same levels of appreciation, or had qualified for the lowest possible interest rates, in general, the story was a very positive one.

Even if a homeowner hadn’t increased their income substantially during the time in the home, they had a significant amount of capital available to allow them to move up the property ladder.  In many cases, these moves took place with the homeowner not seeing a significant difference in their monthly mortgage costs, despite buying a home that was hundreds of thousands dollars more expensive than their prior home.

It’s a good story, with happy homeowners, moving up and forward, finding new and better homes that they can afford, primarily because they were smart enough (or lucky enough depending on who you ask) to buy a home and finance it at a low rate.

Nothing stays the same forever though, and we’ve seen some significant changes in the real estate markets in the GTA in 2022, which leads us to an important question.

What will the next chapter look like?  Odds are, it won’t be as good.

When we look at what has changed this year, we see that the two factors that made being a homeowner such a good story have changed.  We’re going to have to go into a few numbers but I promise we’ll get back to the actual story bit soon.

First off, let’s look at interest rates.

The Bank of Canada has had eight policy interest rate announcements in 2022, as is the norm for the institution.  These overnight rate announcements have a direct impact on the variable rate for mortgages as these rates are what the banks use to set their prime rate.

When we look at what the results of the eight rate announcements were this year, we see that were seven rate hikes.  The latest and last for the year (which took place on December 7, 2022), saw the Bank of Canada raise its overnight rate by 50 basis points to 4.25 per cent.  The last time the bank’s policy rate was this high was in January 2008.

We won’t focus on the numbers too much, but it’s worth pointing out that at the start of the year, you could get a 5-year variable rate in Canada for 0.85%.  After the latest BOC announcement, the best out there for a  5-year variable rate in Canada is 5.30%. That’s an increase of over 500% since the start of the year.  Ouch.

The impact of these changed interest rates on how much of your monthly payment is principal versus interest is massive.

At the start of the year, if you were lucky enough to get the lowest possible variable interest rate mortgage, 81% of your mortgage payment would have been principal repayment.  That’s from your first payment and it just gets better over the term.  On average, you’d have paid 83% principal and 17% interest.

With the latest rates, your first payment would see you pay 27% principal repayment and 73% interest.  Not quite a total reversal, but pretty close.  Over the course of the term, it gets a bit better, and when you look at all of your payments, you’d pay 31% principal and 69% interest.

What about fixed rate mortgages?

On the fixed rate side, things aren’t much better.  These fixed rate mortgages are based on bond yields and they have also gone up considerably in 2022.  At the start of the year, you could get the best high-ratio, 5-year fixed rate in Canada for 2.34%.  By the end of the year, the best option is 4.69%.  That’s just over 100%, which in layman’s terms, means they doubled.  Not nearly as bad as what happened with variable rates, but still a huge change.

The impact of these changed interest rates on how much of your monthly payment is principal versus interest is also huge on the fixed rate side.

At the start of the year, if you were lucky enough to get the lowest possible fixed interest rate mortgage, 56% of your mortgage payment would have been principal repayment.  That’s from your first payment and it just gets better over the term.  On average, you’d have paid 59% principal and 41% interest.

With the latest rates, your first payment would see you pay 31% principal repayment and 69% interest.  Not quite a total reversal, but pretty close.  Over the course of the term, it gets a bit better, and when you look at all of your payments, you’d pay 35% principal and 65% interest.

The end result is that whether you went with a fixed or variable rate mortgage with a purchase right now, only about a third of your mortgage payment is principal repayment.  When homeowners who bought recently look to move up the property ladder or even just renew their mortgage, they will not be seeing the significant level of equity freed up by their mortgage payments that we’ve been enjoying over these years of incredibly low interest rates.  They will have paid off some of their mortgage, but the bulk of it will still be there and need to be paid off before they have the remainder available for a new purchase.

Into the Unknown

The other part of the equation for our story moving forward is how much will home prices have appreciated when current buyers are looking to sell.  While the specific appreciation varied based on the type of home, location and even price point, the real estate market has been on a tear for the past couple of decades.

When current buyers are ready to make a move, will their homes have appreciated to the extent that it is financially feasible?  We already know that they won’t have built up a significant nest egg in the form of principal repayment during their mortgage term, so the pressure lies on the real estate market appreciation to allow it to happen.

If we see a mostly flat real estate market for an extended period of time, then homeowners who want or need to move up the property ladder will find themselves in a bit of a bind.  Unless they have had significant career and income advancement during that time, they won’t have the ability to cash out on their current home and move up the ladder for the same cost.

We will be watching the interest rate environment as well as the average resale price closely over the next year or two.  If interest rates stay the same or continue to rise, then home owners will be in a bind when they want to make a move.  If the real estate market stays flat or even sees more price drops, then the situation worsens.

While what comes next is unknown, we are clear that real estate fundamentals are more important than ever.  If you buy a good home, in a good area, at a good price, whatever happens with the market, you’ll do better than the market.  If that sounds appealing, then don’t hesitate to get in touch.