Just a few short months ago in a rapidly rising market buyers and sellers were trying to understand the value of a property. In turn, as the market started rapidly returning to normalized levels, buyers and sellers were once again challenged with the understanding of what the value of a property is.
The market has gone through a price correction over the past 4 months. In April, as the average price of a home reached its peak and since then prices have slowly made their way back to more normalized levels.
The Toronto Real Estate Board reported that in April that the average price of all home types was $920,791. In May, the price decreased by 6.2% to $863,910, June saw another decline of 8.1% to $793,915 and finally, in July, we observed as the price dropped once again by 6% to $746,218. These price adjustments have stemmed from the April 21st announcement of the “Fair Housing Plan” by the Ontario provincial government to cool the real estate market. The overall price of a home remains 5% higher year over year.
Closer to home we see that prices in Markham and Stouffville have also made their way back to normalized levels. The average home price in Markham went from $1,204,092 in April to $1,001,282 in July, a decrease of 17%. Stouffville trended in a similar direction with prices starting at $1,260,868 in April and ending at $933,428 in July, a 26% decrease. These prices are now more in line with 2016.
Establishing a price in the current market can be overwhelming because of the recent price changes and lack of benchmarks. Over the last 3-4 months pricing has begun to normalize and it may be tempting to try and “test the market”. This is not a good idea. When a property is first released to the market it has a “window of opportunity” where it is the most receptive to potential buyers. An incorrect price could turn potential buyers from the property.
In order to ensure that a property is sold in the current market conditions an experienced real estate agent will need to be strategic with their approach to price. The agent will do all the necessary comparable research and determine that in order to maximize the potential for a sale the home will need to be priced “ahead of the market”. This means setting their price below the current market. If a home isn’t priced ahead of the market, it may well be priced out of the market. Once a seller falls behind, they can end up chasing the market down.
- Fair Market Value declines during a market shift.
- Seller hopes a higher initial price will draw a higher offer
- Market interest is fragile (with high inventory) and wanes quickly
- Salable price is impacted by declining market values, “staleness,” and competition
- Small price reductions only “chase down the market”
- Properties sell when buyers see very attractive prices
- The cost of overpricing is amplified after a shift
If the price of the property is not set correctly in the beginning. The overall end sale could be a lot less than the market value.
Careful planning is done when setting a price in a shifted market. As the market shifted from an overly aggressive seller’s market to a more normalized market, individuals may have felt we were shifting to a buyer’s market. When establishing a price in a buyer’s market, there is very little room for error. Buyers who are looking for a home expect great value (a good home at a good price). With lots of competition in a buyer’s market it is imperative that a home be in its best condition and that it is priced correctly and competitively. Pricing a property in a buyer’s market can be a challenging task as one detail can mean being “in the market” vs “out of the market.” A top real estate agent conducts extensive research to ensure each one of their properties is priced correctly for the current market it is in.
In July, the Bank of Canada raised its interest rates by 0.25%, with the possibility of another hike coming in September. News also broke that the Office of the Superintendent of Financial Institutions said it plans to require home buyers who do not need mortgage insurance (those with down payments greater than 20% of the purchase price) to prove they could still afford their mortgages even if interest rates were two percentage points higher than the rate they are offered by their bank. Although the average home price has come back close to 2016 levels, should interest rates continue to rise this once again could limit the number of potential buyers.
Prices will continue to receive downward pressure in the short term and our estimation will be that they will begin to normalize. Economic factors will continue to dictate pricing moving forward and a seasoned real estate agent will look to the most recent sales to determine the current value of a home.
Source: Keller, Gary. Shift: How Top Real Estate Agents Tackle Tough Times. USA: Rellek Publishing Partners, Ltd, 2009.