Buyers who wait end up losing
Residential real estate pricing is primarily based on two key factors: supply and demand. Now, there are a long list of items that affect both supply and demand, items such as the economy, politics, interest rates, family, and the list goes on. But ultimately, at the end of the day, no matter where the chips fall within the factors that affect them, supply and demand dictate pricing. Low supply and high demand, prices go through the roof. High supply and low demand, prices become more negotiable. It truly isn’t rocket science.
A perfect world is a balanced market. A stable 4% to 5% yearly increase in property value with a close to equal share of properties both listed and sold within a calendar year.
This, however, has not been the case in the past few years.
During the pandemic, notably in 2021, home prices went through the roof in Québec. Demand was so high, and supply was so low. Multiple offers were the way of doing business, so much so that if you even dared present an offer with conditions such as a building inspection or financing with less than 20% for a down payment, your offer was most probably not even being considered!
The start of 2022 was similar…until about mid-year. From early 2021 to about June 2022, Québecers had spent tremendous sums of money on gadgets, trinkets, and of course real estate which they were acquiring at ridiculously low variable interest rates. It was a glorious time for “credit”. And why not? The world was apparently at a standstill with no end in sight. Property values in one year alone went up over 20% due to the demand and historically low supply.
And as Ray Liotta playing Henry Hill said on the stand in the iconic movie Goodfellas…“and now it’s all over”.
By end of 2022, the overnight rate went from 0.25% to 4.5%. Variable rates reached their target rate where in some cases, the monthly payments weren’t enough to cover the loans, so banks were eating into the capital already invested in the property to cover costs.
The market needed to adjust itself…and it did. Roughly about 17% to get back down to pre-pandemic levels. According to economists, this has now occurred, and we are getting back into a balanced market as we knew pre-pandemic with some predicting a 4% to 5% increase in property values by the end of 2023.
So why are buyers waiting and think there are deals to be had? Truthfully, I have no idea…because there are no deals to be had and waiting is the dumbest thing they can do right now if they want to get into the market.
The idea of the “the customer is always right” is not one that applies to residential real estate, especially when it comes to buyers. More often than not, buyers believe because they have money to buy that the world is owed to them and that what they are willing to pay should be the final sale price.
Wrong. The market is dictated, as mentioned at the beginning of this article, by supply and demand. Period.
When a market shifts downward to adjust itself, buyers automatically assume prices are dropping and that deals are there to be made. Not at all. In fact, that couldn’t be further from the truth. What is actually happening, is that the surplus that someone can get above and beyond the value of their property is diminishing because demand is not as high as it once was.
So for example, let’s take a home that’s actually worth $1 000 000 in a desirable neighbourhood. During the pandemic, potentially that $1 000 000 home could have gotten as high as $1 200 000 because demand was through the roof! Today, the home will probably sell closer to its actual value, which is $1 000 000. Does that mean the home dropped by $200 000? No. It just means that today, sellers can’t “fish” for more money because if they do, they will stay on the market longer. On the flip side, buyers can’t assume that because a house is listed at $1 200 000 and it sells at $1 000 000 that the market dropped. It simply adjusted itself to reflect realistic present values.
Logically, if the market went up over 20%, then why would buyers think the market “dropped” if the adjustment in prices is only be 17%? If prices were to “drop” then the adjustment would need to be greater than the increase.
Common sense is clearly not so common.
As such, todays buyer needs to take the following points into account:
- Buyers need to stop thinking they can beat the market
- Buyers need to work within their present affordability
- Buyers to educate themselves on current market conditions
- Buyers need to have a trusted realtor guide them through the process
Lastly, buyers need to realize that one day, they will be sellers. Let’s see how quickly those tables will turn when they are on the flip side of the coin receiving unfounded low ball offers on their home by buyers who think that because they are the customer, they are always right.
With all this information out there, buyers need to work with, and more importantly trust, their realtor. The same way a seller needs guidance to put their home on the market, buyers need guidance to navigate in ever changing markets.
So for all you buyers out there, I have but one question…would you rather pay now, or pay more later?
Founder and CEO, Berkshire Hathaway HomeServices Québec