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Sold Over Asking: Why Real Estate Bidding Wars Could be on the Way Out

June 1, 2021

Even if you’ve been living under a rock for a year (which is a pretty close equivalent to living through the pandemic), you’ve probably heard the stories drifting down residential streets of homes selling for $50-, $100-, $500,000 over asking price. And it’s not just word of mouth: in late April, the Financial Post reported that a home in Toronto recently sold for more than $1 million over the listed price.1

But since April, another narrative has been gaining speed: there’s talk of a housing bubble, of the market cooling, and of waning consumer confidence. If low interest rates and stay-at-home orders have been fuel to the fire in the real estate market, these ominous projections are like water.

In light of the most recent reports of declining sales and plateauing prices in some of Canada’s hottest real estate markets, we’re taking a look at the reasons behind the over-asking frenzy and how the tides are starting to turn.

Setting the stage: Supply and demand

Since the early days of the pandemic, demand for real estate has gone supernova as many Canadians pull up stakes to find homes better suited to their changing needs. Add to that the freedom to leave urban centres now that many jobs have gone remote and historically low interest rates meant to stimulate the economy, and you’ve got a lot of very eager buyers ready to put their money on the table.

However, in the spring and summer of 2020 – the seasons when the most listings typically come onto the market – many home owners became hesitant to list, with some deciding to wait out the worst (or perceived worst) of the pandemic. This led to inventory levels in many local markets hitting historic lows through late 2020 and early 2021 at the very same time that buyer demand was reaching a crescendo.

The result, of course, was that the giant influx of buyers began competing for a very limited number of homes.

Gavel with a model home in the background, representing real estate bidding wars

Enter: The blind bidding system.

In most other kinds of competition, players can gauge what it’ll take to win by what their competitors are doing – a sprinter, for example, might push that much harder if he can see another runner gaining on him from the corner of his eye.

Such is not the case in Canada’s real estate bidding process. When prospective buyers want to purchase a home, they’re allowed to know if there are other offers and how many there are, but there’s no transparency regarding the offer details – namely, how much competitors are offering to pay. Thus, each buyer makes a “blind” bid, hoping it’ll be high enough to get them the win.

In hot markets or when a highly desirable property is listed, it’s also common practice for sellers to set an “all offers” date, which is a specific date and time when all offers must be presented for en-masse consideration. The all-offers date doesn’t fundamentally change the blind-bidding system, but it does tend to drum up excitement in the local market.

And, since that kind of excitement is exactly what sellers want, listings with all-offers dates tend to sport attractive price tags meant to entice more buyers to the table.

With so much tension in the lead-up to making an offer and so many competitors to contend with, it’s hardly a surprise that many buyers – some of whom may have already lost out on numerous other homes – have been going all-in, offering tens or hundreds of thousands more than the advertised price.

The winds of change may be blowing

Months of frothy competition in many parts of the country have driven the national average home price up a perplexing 41.9% since April 20202 – after all, it’s the selling price, not the listed price, that drives market value. But because low supply and high demand are major contributors to the frenzy, the tide may finally be turning.

Since February, many parts of the country have seen an uptick in new listings, which has been helping the overtaxed inventory catch up and fill out a little in some local markets. What’s more, sales are beginning to slide backward.

Weathervane with a bright sky in the background

In Toronto, one of Canada’s largest and busiest real estate markets, 3.8% more homes came on stream in April than in March, while the number of sales fell back by 9%. By the end of April, there were 16.8% more available properties for sale than in the previous month.

And the effects of the larger inventory could immediately be seen: where the overall average selling price in Toronto leapt 15% from January to February3 and 9% from February to March,4 it went up by just 0.4% – a little under $5,000 – from March to April.5

Randall Weese, Broker of Record at Purplebricks, comments, “over the course of about two weeks between March and April, it was as if a tap was turned off on the bidding wars. Buyers are starting to trust that each new listing won’t be the last listing ever, and suddenly we're seeing those massive overbids drying up.”

Of course, some local markets continue to watch prices shoot up each month as achingly low supply is squeezed by relentless buyer demand, but markets like Toronto may be the weathervane for the rest of the country. At the national level, there’s already evidence of a shift: the sales-to-new-listings ratio has made a downward journey from 90.6% in January to a more comfortable 75.2% in April – still high compared to the long-term April average of 54.5%,6 but a considerable step in the right direction.

Shifting consumer confidence  

If an encouraging supply of inventory is starting to cool off real estate bidding wars, it’s being helped by the growing fear that home prices could soon fall.

Not only has the Office of the Superintendent of Financial Institutions and the Federal Government introduced a new mortgage stress test on June 1 that could slash demand, but major news outlets sport headlines answering public concerns over a housing bubble,7 and there’s talk that interest rates might soon go back up.8 Though some industry experts say we’re not in danger of a bursting bubble9 (a topic for another day), easing national sales could suggest buyers are getting gun-shy.

A Bloomberg Nanos poll from the end of April revealed a gradual slide in consumer confidence, with only 63% of surveyed Canadians indicating that they believe real estate value will go up in the next month, compared to 65% in mid April and 67% in March.10

The concern, of course, is that a home purchased today for possibly hundreds of thousands of dollars over the asking price could be worth much less in the near future, which is a recipe for some pretty serious buyer’s remorse. Not only that, but if buyers purchased with the intention of selling, they might not get back what they put in if prices go south. 

Timing, as they say, is everything. In March, multiple offers, unconditional offers, and homes sold over asking were practically old-hat, and sellers were in their glory. Only a few weeks later, the trend began to visibly shift, and many buyers are cooling their heels as they wait to see what unfolds. After almost a year of watching home prices climb in head-shaking amazement, Canadians might finally be ready to look the gift horse in the mouth.

In shifting markets, the guidance provided by a local REALTOR® can’t be overestimated. A Purplebricks REALTOR® will provide you with the latest market data to help you buy or sell at the right price, plus, buyers receive $2,000 cash back* and sellers save thousands in commission! Let us help you reach your real estate goals. Call 1-855-999-9740 to speak to an associate today.

Sources
[1] Sold over asking: Why homes are being sold for far more than their listing price. Retrieved May 19, 2021.
[2] CREA: National Statistics, April 2021. Retrieved May 20, 2021.
[3] Toronto February 2021 State of the Market Report
[4] Toronto March 2021 State of the Market Report
[5] Toronto April 2021 State of the Market Report
[6] CREA: National Statistics, April 2021. Retrieved May 20, 2021.
[7] CBC: When will the real estate bubble burst? It won't, says veteran real estate appraiser. Retrieved May 24, 2021., BNN Bloomberg: Housing bubble worse than lead-up to subprime crisis: Rosenberg. Retrieved May 24, 2021., The Globe and Mail: The trouble with ‘bubble’: Why Canada’s red-hot housing market is defying the burst. Retrieved May 24, 2021.
[8] CBC: Bank of Canada offers fresh hints that interest rates will rise next year as economy surges. Retrieved May 24, 2021.
[9] CBC.ca: When will the real estate bubble burst? It won't, says veteran real estate appraiser. Retrieved May 27, 2021.
[10] Bloomberg Nanos: Positive consumer confidence trajectory flattens, April 30, 2021. Retrieved March 24, 2021.