Canadian Real Estate Sales Have Dropped, and Prices Are Following

The Canadian Real Estate market has been experiencing 3 months of declining home sales. In June and July sales in Canada were down by 30%. Despite the drop in sales, the average price for a home remains close to the all time high. However, prices are starting to fall. June’s average home price was only 1% higher than in 2009. Major Markets, like Toronto, are following suit. Sales were down 29% in July and 27% in the first two weeks of August. The average price for a Toronto home was $435,034 in June and $420,482 in July and $412,934 in the first 2 weeks of August.

It takes time for prices to fall:

Typically home prices start to fall a few months (3-6 months) after the number of home’s sold begins to fall. When home sales begin to decline, then many homes for sale do not sell. There becomes a larger inventory of homes for sale and buyers have a more homes to choose from. Some sellers will lower their price. Some sellers might wait for “their price” (if they think the fall market will improve) and some sellers will take their home off the market. However, what really drives prices are the sellers who have to sell at any cost. These are usually:

- Sellers who have already purchased a home
- Estate sales
- Sellers who are getting divorced
- Sellers who have lost their job

Ultimately these sellers are in a bad situation and are just willing to sell at a lower price. These lower sold prices start to drive home prices downward.

Buyers start to wait:

There is a “viscous circle” that begins to feed itself in a downward market. As news begins to be released saying that the house prices are dropping and home sales are declining, then buyers start to wait. Buyers wait because they believe that they can purchase a home in a few months at a lower price. The more buyers wait, the more desperate that sellers become. This serves to drive house prices downward. Of course some buyer have to buy. They need a place to live. They cannot wait. Buyers who need to buy will usually put in bids that are lower than asking prices. Because the amount of homes for sale is higher, Buyers can also choose to purchase the home that they truly want, rather than settling for a home that might not be their perfect home. This means that the homes that sell in a down market are usually the homes that have all the features that buyers want. All the other homes with “compromises” usually sit on the market for longer.

The Sellers Psychology:

As we said, it usually takes a few months for prices to drop. This makes sense if you consider the seller’s thoughts on pricing their home. When a seller first decides to list their home, they rarely take into consideration the drop in the number of homes for sale. They instead usually concentrate on the selling prices that other home owner’s received (sold prices). So when a seller decided to list in a down market, they look at homes that sold over the past 6 months. They will look at what their neighbour received in the hot market and then think “I want to get the same amount of money”. Thus, they usually list their home at a similar price point, despite the fact that home sales are decreasing and prices are starting to follow.

This same seller, if they have not sold at their higher price in one to two months after listing, will then start to consider a price reduction. The next stage of the seller’s home strategy begins. However, this is usually 2 months down the road, and now prices have decreased further. Despite the drop in their asking price, their home can again sit on the market for another 1-2 months. Sometimes they blame their agent: “They’re doing nothing to move my house” and they switch agents. The new agent lists the home at the same price, with the same results…and they start to consider another price reduction. This is called “chasing the market”.

The Best Strategy For A Seller:

If you are listing your home in a down market, you have to have a good strategy. This includes:

- Not being greedy. Most people understand supply and demand. If homes are not in demand, now is not the time to try for your dream price
- A fair price to start. (Selling privately allows you the opportunity to price your home at a great price for a buyer)
- Make sure your home has what buyers want. (clean, no immediate repairs, looking better than all similar homes)
- Be quick on your price drops. If you have to sell, then there is not time to lose. Drop your price every 2 weeks until it sells.

Of course no one likes losing money on there home or any other investment. If you don’t need to sell, you can always wait. For example, during the financial crisis, home prices in Canada dropped by $25,000-$45,000K in a matter of months. The desperate sellers had to sell for a low price. Those prices bounced right back up a few months after the financial crisis. This was one time that waiting to sell paid off.