What the TREB ruling means for you

Ever wondered what that house across the street sold for? That information was only available to you through a Realtor, but not anymore. The recent ruling by the Supreme Court of Canada, refusing to hear an appeal from the Toronto Real Estate Board (TREB), over access to real estate data, will have repercussions across the country.

For years, TREB, a private organization restricted access to its home sales pricing data, although it was readily available to consumers through a Realtor.

For seven years, TREB fought against the federal Competition Bureau, with TREB insisting that publishing sales and other market data online violated client privacy and its own copyright over the information.

For many consumers and Realtor members, the ruling was a win for full transparency rather than for a loss of privacy. 

Commissioner of Competition, Matthew Boswell, said in a statement, “The ruling is “a decisive victory for competition, innovation and for consumers. The removal of TREB’s “anti-competitive” restrictions will give homebuyers and sellers “greater access to information and innovative real estate services when making one of the most significant financial decisions of their lives.”

There is the argument that releasing this data will negatively impact the market. However, there are two examples that counter this argument; when the US real estate housing market started releasing this data, the industry grew. And, there was a time in Canada when stocks and bond data was private and when it started to release its data, the industry grew and flourished.

TREB continues to argue that financial information about selling prices is a privacy issue. While they consider their next steps, let’s take a look at what the fallout will mean for both buyers and sellers.

The Toronto Real Estate Board is the largest board across Canada. It won’t be a surprise if other board follow their lead and start releasing sales data. Remember, consumers already had access to the data through their Realtor.

For Buyers

Knowing the asking price is only one factor – it’s the selling price that’s most important. Knowing selling prices will give buyers a better idea of the value of the home they want to buy. This could result in sellers listing their homes closer to the average selling price.

For Sellers

Transparency allows buyers to properly assess the value of their own homes without relying on the real estate agent.  Buyers can then make better pricing decisions if, for example, they want a quick sale. 

Overall, access to housing history and data puts the power into the hands of consumers. We could also see a lowering of prices in hot areas such as Toronto and Vancouver as consumers become more empowered.

The truth of the matter is that Realtors, similar to mortgage brokers, have their value rooted in their ability to educate the consumer and various options – that their jobs are about service. Data is not the product, service is.

Full transparency is good for consumers  and sustains a healthy, robust real estate market.

Bidding Wars – Cause or Effect?

What was once the phenomena of the two, major urban centres – Vancouver and Toronto -- has now bubbled over to smaller cities and communities within commuting distance of the big two. 

Bidding wars are now commonplace and can be both rewarding and stressful.

The numbers can vary to $10,000 to $20,000 over asking price, and that’s at the low end, to upwards of hundreds of thousands over asking. One house in Vancouver went for $1 million over asking recently – what seller is going to say no to that? But can the market sustain it? 

Sales of existing homes rose by 8% in February compared to the same month a year earlier, while the national average home price soared 17% according to a Canadian Real Estate Association (CREA) report.

Some experts point to these bidding wars as the cause of high prices. Others say that the phenomena is the result of lack of supply. It may be a bit of both. 

While sellers may be happy about cashing out, the problem becomes, where to go? And buyers, who want to buy a home may not have the financial means to get into a financial tug of war with other buyers. The stress alone may cause them to just stop looking.

Patricia Boon, a veteran Realtor, who has been working in the Woodstock area for 30 years is not happy with the way houses are being sold these days.

“I don’t feel good about what’s happening. No one is looking out for the buyer,” she said. “This is isn’t good for anyone. Why play a game with the most expensive item you’re ever going to buy in your life?”

In Woodstock prices are up 15% over last year and, similar to other cities, there is a lack of single-family homes available for sale, which is creating a perfect scenario for bidding wars as we head into the Spring market.

Even more concerning for Bonn are the offers that go in with no conditions. “It’s not unusual for appraisals to come back lower than the purchase price two weeks before closing, even with a pre-approval,” she said. “Then the buyer has to scramble to come up with more money for the down payment.”

Bonn recalls a time not too long ago when the housing market was facing a similar situation.  “When it was time to remortgage, homeowners could not qualify. Or the market had corrected and now the mortgage that was higher than the property value. Many people walked away.”

To Condition or Not to Condition

Purchasing with no conditions is a slippery slope. Mike Rogozynski, a mortgage broker with OMAC Mortgages Powered by TMG, who works out of the Woodstock area is seeing more out-of-town purchasers and investors coming into the area, which already has a lack of housing supply.

 “Realtors lining up offers is definitely a factor for making the case that bidding wars may inflate prices; however, it’s a fine line,” he said. “ We already have a growing demand and lack of supply.”

Rogozynski strongly advises his clients to always put in a financing condition, even if it’s just three business days. “Anything can happen, even with a pre-approval,” he said. “A key component is the property. An appraisal may come back with a lower value, or a home inspection may turn up something negative.”

The Appraisal

Many appraisers are looking for marketing support when they value a property. Lending decisions are made on a property’s fair market value, which is defined as the market value of an interest in land at the highest price reasonably expected when sold by a willing seller to a willing buyer after an adequate amount of time and exposure to the market.

So, who determines the value of that property? One could argue that the market itself determines the value, which may be true, but a lender wants to know if the purchase price is reasonable.  An appraiser, who is specifically trained and who has sufficient experience, will be asked to offer an independent, impartial written opinion of the property’s value.

Appraisals are done for a specific client -- the lender. Because real estate is the major security for mortgages, the market value estimate needs to be as accurate as possible. 

One appraiser we spoke to from the Brantford area, who wishes to remain anonymous, says he tries to get to the purchase price when evaluating a property but sometimes the sale is a few weeks ahead of the market. For example, appraisers will conduct a comparative analysis of similar properties in the area that have recently sold. If prices are increasing, it may not show up in their analysis yet.

 “I also get a lot Realtors telling me the client spent $50,000 to renovate a kitchen and expect it to value out at that amount, which is not the case,” he said. “The fact that it was an upgrade is considered and is an added value, but not the costs.”

“At the end of the day, we have to be realistic of a property’s true market value and be able to back that up with data.”

A Realtor’s role in rising house prices

A written response from the Canadian Real Estate Association (CREA) said the 'bidding war' phenomenon is usually limited to very active markets where strong demand overwhelms limited supply. Although other Canadian markets may see multiple offers for exceptional/rare/sought-after properties, at the moment it is in Toronto and environs where this occurs regularly.

Pierre Leduc, spokesperson for CREA wrote, “As a marketing strategy, a REALTOR® whose seller has a property that is: a) located in an in-demand area and/or b) a unit-type that is in high demand (e.g. 4-bedroom SFH with garage) may recommend to his client to accept written offers at a certain date/time, which provides potential buyers clarity on when and how this sale will occur.

“It is the buyer's responsibility to decide whether or not to participate in this type of sale, and ultimately, how much to offer,” he added.  “REALTORS® don't have any special persuasive powers to force their clients to offer more than they can afford, offer more than the lender will loan them based on assessed value, forego a home inspection or remove other conditions just to be the successful bidder.”

A free market?

Paul Taylor, Executive Director for Mortgage Professionals Canada (MPC) said it was probably unfair to vilify Realtors in a market that has a significant lack of supply. “The current market is driven by demand and there are so few single-family homes available.”

MPC has been working closely with the legislatures, sharing information and making suggestions. One idea is to include a minimum 3-day cooling off period for buyers so as to relieve some of the stress.

“We favour a free market system and we don’t want to get in the way of that,” he said. “However, there is increasing impatience among buyers who want to purchase, which increases the pressure they feel to make condition-free offers.  It’s tough to say what’s best in the long run.”

Bidding wars are indeed risky. If this is the only option, here are some tips:

1.  Do your research -- learn about the market values in the neighbourhood. 
2. Get pre-approved. Make sure your mortgage broker has all documents upfront. 
3. Although conditions with offers may get sidelined, try to get a financing condition for at least three business days
4.  Sometimes, it’s not always just about the money, so write a letter explaining why you want that particular house.

Good luck!

Diving deep into the housing market

Recently, Finance Minister Bill Morneau said he would "deep dive" into Canada's housing market to find out what’s really affecting record-high prices, arguing that if the government is going to make any changes, then it should be evidence-based. So let’s look at some of the “evidence”.

Interestingly, Morneau divides the housing market into four parts. The stable market, which is a significant portion and includes Montreal and Ottawa; the strong part, which includes the Toronto region where housing factors are moving quickly; the "very strong part", which is Vancouver and nearby areas; and the areas that are not doing so well because of the downturn in the oil industry. Then there is, of course, the foreign investment factor.

Overview of current housing market

The state of the Canadian economy has changed, and so too has the housing market. A look at the Statistics Canada website shows some interesting numbers: As of May, the unemployment rate is down; retail sales are up slightly; manufacturing sales are up slightly; and average weekly earnings are up, slightly. These are all good indicators that the economy is growing – but not as robust as it grew prior to the 2008 recession, but growing nonetheless.

In Mortgage Professionals Canada (MPC) Spring Report, Looking for Balance in the Canadian Housing and Mortgage Markets, it found that the number of adults with jobs is lower now that before the recession. So what accounts for the hot housing markets in parts of Canada? The real difference is now we have low interest rates, which have fuelled the housing market, and indeed, has kept the Canadian economy humming along for quite some time. We also have some indication that foreign investment is adding fuel, as well as a lack of supply.

If we take all the factors above and match them to the four parts of the housing market that Morneau mentioned we find the following:

• In Toronto and Vancouver there is higher population growth. The labour markets are better there and there is much lower unemployment but there are housing supply issues.
•  In the stable areas of the country there is balance in the labour market and adequate housing supply and demand.
•  In the areas impacted by the oil industry, lower rates are not effective because there are issues with unemployment. 

Because the housing market has been under-supplied for a long time (this is a major factor that has fueled prices in both Vancouver and Toronto – lack of supply for single family homes) the result has been a long period of rapid price growth, according to the MPC report. "The recent surge in sales has, once again, sparked a very high sales-to-new-listings ratio, and the rate of price growth has accelerated."

 Housing Bubble Revisited

It's inevitable that, along with reports of a hot housing market, a discussion of housing bubbles follows. But what, exactly, is a housing bubble? Well, it's characterized by property quickly becoming overvalued until it reaches a level that is unsustainable relative to income and other factors including employment. That rapid rise is quickly followed by property value decreasing to where homeowners owe more than the property is worth. What tends to follow is that homeowners, depending on their financial situation, will try to sell the property or will simply stop paying the mortgage, resulting in an influx of foreclosures in the market.

By that definition we could be in a bubble except for the other factors, namely, job numbers and earnings, both of which have risen in recent months. It's when unemployment rises, interest rates increase and house prices continue to rise that trouble follows. Certainly low mortgage interest rates have fuelled some of the increase in activity; however, the increased prices in the high-end markets are still skewing the average. Eventually, those high-end prices are expected to moderate and there are signs that it’s starting to happen.

Government Intervention

 As the Finance minister dives deep into the industry, Mortgage Professionals Canada (MPC) is cautioning the government against regulations that might "cool" the market. MPC said that another clampdown on mortgage lending rules in Canada could unnecessarily cause housing prices and demand to plummet – and even "bring consequent economic damage" to the country.

 "Now that the energy sector is no longer a major economic driver, a healthy housing sector is even more essential," Will Dunning, chief economist with Mortgage Professionals Canada, said in a statement.

 Morneau announced that Ottawa was forming a working group with provincial representatives from Ontario and B.C., as well as municipal officials from Vancouver and Toronto, to study Canada's booming housing market and would evaluate whether further steps are needed to protect borrowers and lenders to help maintain a stable housing market.

Since 2008, Canada has tightened mortgage regulations five times, shortening the length of loans and hiking minimum down payment rules.

Mortgage Professionals Canada sees no substantial evidence of a widespread increase in risk taking by borrowers or lenders for these reasons:

• Data from the Canadian Bankers Association shows a very low rate of mortgage arrears, just 0.28% or one per 354 mortgages
• Survey data continues to show that Canadians are highly motivated to pay off their mortgages as quickly as possible 
• At current very low interest rates, regular mortgage payments result in accelerated pay down of mortgage principal. At a current typical interest rate of 2.5%, 2.9% of the principal is repaid in the first year. 

 Bottom Line 

A home is a long term investment and its value will fluctuate up and down over the course of your tenure in it. The housing market right now is at a precipice – when high prices and lack of supply deter home buyers and potential home sellers wait out the market, then we’ll start to see moderating prices, as economists have been predicting for the last few years. One thing we know for sure is that low interest rates are here to stay for at least another year, which will be a boon when the market becomes more robust and affordable.