If you have been following stories on housing during the past year, you have seen plenty of articles like this: "[Insert your city here] home received 30 offers and sold for $200,000 over the asking price". On the flip side, there are many stories of the "winning" bid being far above the second highest bid, meaning that the buyer paid more than was necessary to get the home. There is no doubt that the real estate market in much of the country has been extremely competitive and in many cases, an offer below the asking price will not be accepted (especially when there are many other offers). However, this doesn't mean you always need to bid over the asking price, let alone by hundreds of thousands of dollars. Almost everyone we spoke to during the past year believed this was necessary to have their bid accepted, regardless of their location or the type of home they were looking at. This kind of sentiment can be self-perpetuating - if everyone believes they need to bid over ask to be able to buy a home, then this is exactly what we'll see in the market.
In a system that does not allow for transparent bidding, choosing how much to offer on a home can be an extremely difficult decision. Prices have also been very volatile recently, making it challenging to assess a home's value while also adding pressure to buy as soon as possible. Adding to the complexity, it is commonly acknowledged that many sellers are listing their homes below market value in order to attract more interest and create competition amongst potential buyers.
The purpose of this article is not to explain how to come up with a bid amount. This article takes a deep-dive into the data which dispels the myth that you always need to bid over the asking price.
Data, assumptions, and terminology:
In this article, we will be focusing on data for the Greater Toronto Area (GTA) but many of the concepts can be applied anywhere in Canada. The data relating to the GTA is provided by the Toronto Regional Real Estate Board (TRREB) and may include some sales outside of the formal GTA boundaries. When looking at TRREB data, we are only considering the most common types of residential properties (detached, semi-detached, row homes, condo apartments, and condo townhouses).
The close to list ratio is simply the price that a home sold for as a percentage of the asking price. This can be calculated for a single transaction or looking at a particular segment of the market. Since the lack of transparency means there is no data available regarding the number and values of bids that are being made on homes, this is one of the best ways to understand the competitiveness in the market.
Months of inventory statistics are provided by CREA. This helps us understand the balance between sales and the supply of listings, representing the time it would take to liquidate current inventories at the current rate of sales activity.
Many people may not have been paying much attention to the housing market until recently, when it is seemingly being discussed non-stop. If you have only been watching during the past year, certain things may seem normal but in reality are not. Let's start by looking at the percentage of homes sold above the asking price since 2019.
In the above chart, we can see the line was fairly consistently below 30% in 2019 before trending sharply higher in the few months prior to the onset of the COVID-19 pandemic. This means that even in the GTA, one of the hottest markets in the country, the majority of homes were selling below the asking price for an extended period of time. After April and May of 2020 which saw low sales volume, the percentage of sales over ask kept increasing until hitting a peak of approximately 78% in March 2021. Since the peak, we have seen this figure drop to approximately 71% in May 2021. There are many overarching factors contributing to the increased competitiveness and prices, but the chart below shows how out of balance supply and demand were.
This chart shows the months of inventory in Ontario, with each line representing a different city or region. In the past 30 years we have never seen a situation like we have in 2021 before, where all 44 locations tracked by CREA have extremely low levels of inventory. Given the lack of inventory, there is no doubt that bidding on homes will be competitive. Remember though that with the ongoing pandemic we are in an unprecedented situation and we can also see how inventory in many cities was very low in the early 2000's but grew much higher from 2008 to 2015. The inventory supply could change quickly as the country returns to normal and people look to cash-out on their now extremely valuable homes.
In the chart below, we have plotted sales from January 2021 to May 2021, where each dot represents a single sale and we can see the close to list ratio as well as the close price. This chart includes significant data points that allow us to understand the general distribution and outliers. We can see that far more transactions closed above the list price than below. However, we know that the first five months of 2021 saw record sales volume and prices in the GTA and despite this record seller's market, there were still many homes sold below the asking price.
In the chart below, we can see a much different looking distribution for 2019 sales when the market was more balanced.
In the above two charts we are looking at many property types across a large region - if we were to narrow the focus to a specific city and property type, we would see vastly different patterns in the close to list ratio. Below we go back to 2021 but are just looking at condo apartments in Toronto specifically. Most sales above $1,000,000 sold below the asking price and it is certainly not uncommon even in the lower price ranges.
Going back to the broader GTA again, the lines in the charts below show the percentage of homes sold above ask in each year for different property types. These again show why you need to evaluate your bidding decision on a case-by-case basis.
What do all these charts tell us? Do not just assume that you need to bid over the asking price when looking for a home. When speaking in broad terms, more homes are selling over ask than not lately. However, this is not true in all cases and we have seen how this changes over time (sometimes as quickly one week or month!) and depending on other factors like the location, price range and property type. Work with a realtor who really understands the local market and can advise you using data-driven analysis when you are looking to make an offer. Your bid should be based on the actual value of the home and not the list price. There is a cognitive bias called the anchoring effect, which describes the tendency to give too much weight to the first piece of information (in this case the list price). Be mindful of this bias when making bidding decisions and try to be as informed as possible.
After reading this article:
Check out our analytics platform, where you can find tools to help you plan for buying a home and visualizations for historical home prices, income, rent, and more. This can be found on our home page.
See our other articles below. Our most recent article "Canada, let's talk about sustainable home price growth" discusses why the trends we have seen in the past may not continue.