Understanding the Real Estate Market

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The February- May market took off with multiple offers.  Average house prices went up by 10-15% compared to their value in early January. There was a shortage of homes for sale and the few homes available create bidding wars. For every home, there were about six buyers, all afraid of missing out.

The Ontario Government announced that it will take measures to cool the market off. They set a 5% tax on foreign buyers and the market dropped over night.

What really happened? Are there so many foreign buyers who because of the extra tax backed off? Not really. Foreign buyers only accounted for about 3-5 homes sales in Toronto.

The real culprit is local speculators. Let’s analyze what really happened. Assuming there are ten homes for sale. Speculators grabbed six homes leaving the regular buyers with only four homes to bid on and hence a bidding war.

With the government announcement, most of the speculators did not buy and hence the supply climbed. These very speculators dumped their homes back on the market and created a flood. The buyers noticing that the price was falling sat on the sidelines looking on.  With more homes on the market and fewer buyers, the market moved towards a more balanced market where the buyers can shop around and buy the home they liked.

The price drop created another problem. Many of the homes that were in the cold months were scheduled to close in June and July. The home price dropped and the banks re-appraised the homes. The price in some instances came down by 5-10%. Many buyers chose to walk away from their deposit. Also, the banks would finance based on the appraised value and with the price drop, the appraised value came in less. The buyer must now come up with the difference.


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