Are Realtors Behind the Crazy High Prices? Short Answer: No.

A Twitter pal posted a tweet today blaming realtors for the hot real estate market in Ottawa, because most listings these days hold off on offers until a specified date.  So let me debunk that popular myth. There are a couple of reasons for the explosion in home prices. One pre-dates the pandemic; the other is because of it.

 A couple of years ago, the federal government made it harder for first time buyers to borrow money by tightening what’s called the mortgage stress test. As a result, they had to rent longer while they saved more money for a down payment. That put pressure on lower-priced properties, because these were more affordable for first time buyers but also  a good deal for investors, because the rental market had tightened and that meant higher rents. When lower priced properties become more expensive, that has an effect all the way up the food chain. Prices went up.

So the federal government then tightened up the mortgage stress test to make it harder for all buyers to borrow money, not just first time buyers.

Under the new rules, lenders  only look at income, not equity or assets. Retired and semi-retired people tend to have lower incomes, so it became harder for them to borrow. Most older folks want to find a place to move into first before they sell so they like to buy before they sell, but could no longer easily get that funding. The fear of selling and being homeless left many feeling stuck, and we saw a further drop in inventory. Prices began to spike even higher.

You can see the increase in prices in this graph which shows the  Ottawa Home Price Index,  For years, the graph showed modest increases. The first uptick is in 2017 when the feds tightened the mortgage stress test for first time buyers. The second is in 2019 when they applied it to everyone.

So pre-pandemic, we were seeing lower inventory and multiple offers on properties when the pandemic  suddenly hit. Inventory dropped to record lows, and not just in Ottawa, but across the country.

In Ottawa, where a few years ago, we would typically see around 4,600 listings around this time of year, we  dropped to around 3,500 in 2019 (pre- pandemic). Today we have 924. That isn’t just the city — that number includes listings in places like Brockville, Casselman, Arnprior, Perth etc.

So –right now, supply is the problem. Demand is still high, and we just don’t have enough properties to meet it. Because of this, there are multiple offers everywhere, driving up prices to  unforeseen levels. 

My Twitter pal blamed realtors for holding off on offers and creating these  bidding wars. But that’s not what’s causing the higher prices: as noted, it’s the limited supply. When it comes to holding off on offers, we do this for a couple of reasons. We have a fiduciary duty to our sellers to get the best price possible. If we are representing them, that’s our job. To do that we need to get as many people through the door as possible, so they get the best price.

The biggest complaint I hear is that realtors “under price” properties to get bidding wars. My Twitter friend thought a seller should be happy to get their list price. And in a balanced market, we could do that, but not in a market like this. Because in all honesty, no-one knows what fair market value even is  anymore. 

For example, a realtor I know told other realtors he would be listing a property on my street at $ 850K, but if they had a buyer who wanted to buy it before it was listed on MLS, his seller would accept $ 895K in a private sale. Apparently, he got an offer, but the deal didn’t come through, so he listed at $ 850K, held off for a few days, and sold with multiple offers for $ 937K.  That’s over $250K more than I paid for my similar house last August. So what was fair market value? The price I paid?  $850K? $895k? The market decided it was $937K. He did his job for his seller, even if that price seems insane.

If my Twitter pal was the seller, would he be happy with $ 675K if he found out later that he might have had $ 260K more by holding off on offers for a few days? I don’t think so. And remember, the listing agent’s primary duty is to their seller, not the buyer.

There is another reason we hold off on offers. Right now, if we didn’t hold off on offers for at least a few days,  buyers wouldn’t even have a chance to look at properties, much less put in offers. Properties would sell within hours of being listed without them even getting in the door. That makes buyers angry, and it makes their agents angry too, because it isn’t fair. 

By holding off on offers, we give buyers a chance to at least to get inside and decide if they want to make an offer or not. As one frustrated buyer said to me when a property sold before our showing appointment, “I at least wanted a chance to see it.”

When listing agents don’t hold off on offers, I get just as many complaints from buyers that they couldn’t even get in to see the property as I do about those complaining about bidding wars and the high prices.

So the bigger question is — how long will this last? And no-one knows. The Governor of the Bank of Canada, Tiff Macklem, has indicated that the “excessive exuberance” in the housing market  is a Canada-wide situation and that people shouldn’t get used to these high prices, implying the government will take action to cool things down.

The problem is that the tools they’ve used previously involved tightening the mortgage stress test and as I’ve indicated, that just gives an advantage to cash buyers and drives up prices on lower-priced properties, so prices go up even further. Higher interest rates may have a dampening effect, but can cause harm in a fragile economy. What we really need is more inventory and I don’t think we’ll see that until the pandemic is over. But whether things will get back to a balanced market, I don’t know. I expect to see a lot of pent-up demand when this is over. 

Finally, there’s this notion that realtors are making a killing. We’re not.  We work on commission. When listings are down by 75%, we have fewer properties to list and sell. Imagine how long a car dealership would stay in business if suddenly it had only 25% of its usual inventory!  And when we are working with buyers, we are working harder than ever, because we have to submit offer after offer, often without making anything at all. I know realtors who have put in forty offers without a single winning bid. That’s frustrating for the realtor who’s done a year’s worth of work or more without a single commission, but all the same expenses. 

This crazy hot market is not realtors’ fault: it’s the result of market forces we can’t control. I think most of us think this situation is unsustainable, but no-one knows how long this will last or when it may end, because it’s not us driving up prices, but buyers desperate to find properties and willing to pay whatever it takes.

This entry was posted in Ottawa, real estate, Realtors and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s