Is the Real Estate market going to collapse?

Back in 1980 when I was a Real Estate agent the average house price was $90,000. Standard commissions were six percent for an exclusive listing and seven percent if the listing was on MLS (Multiple Listing Service), which was exclusive to Realtors. The commission was split between the seller’s agent and the buyer’s agent. On the average price that would mean $6,300 and  $3,150 to each Realtor. Back in those days most Realtors took fifty percent of the agent’s commission, so that left the agent with $1,575. That was before Realtors like RE/MAX offered up to one hundred percent commissions but with what they called “desk fees” that were usually around five hundred dollars a month. These agents also paid for their own advertising. Also back then twenty percent of the agents made eighty percent of the commissions. There were also a lot of part-time agents, although they were never required to disclose that to clients. Most of those agents just focused on getting listings and let full-time agents do all the work.

Fast forward to today and the average selling price is now close to a million dollars. Over the years there have many firms who have tried different selling options, like reduced commissions (one company tried one percent), flat fees and a consulting fee, but most failed, although new firms are still around. The regulations covering Realtors had also been that every agent legally represented the sellers, on the idea that every agent was obligated to get the most for the sellers. That was never the case because any agent for the buyers was always trying to get the best deal for their clients, not for the sellers. Some regulations then changed to allow for buyer’s agents, which was simply an acknowledgement of reality. Although commission rates in some markets have modified slightly the average rate is still five to six percent. To have your property on MLS typically used to cost an additional one percent but now there are numerous flat fee Realtors. To have your property on MLS you must still use a licensed broker.

In the GTA, the acceleration in prices has been even more compared to many other areas in Canada, with the average home price increasing by 27.7 per cent year-over-year since 2021 to $1,269,900. Using the same commission structure, but with the more typical five percent now, the total commission on the average selling price is $63,450, still split between the seller agent and buyer agent. $31,725 each. RE/MAX no longer offers a one hundred percent commission plan with desk fees, but they still offer agents the largest commission share, now usually seventy percent. Those agents will earn $22,207.  Not much has changed over the years, so twenty percent of the agents still make eighty percent of the commissions.

There are some very scary things happening with house prices lately –

“An Ottawa home has sold for more than $800,000 above its asking price, a potentially record-breaking purchase. The three-bedroom house was listed for $2.3 million last week. This week, it sold for $3.128 million. One home in Manor Park sold for $260,000 over asking recently. And a home on Sandridge Road in nearby Rockcliffe Park sold for $440,000 over asking after being on the market for less than a week. “As it turned out, it was a Toronto buyer. So $2.35 million for a five-bedroom single family in Rockcliffe Park sounded cheap, because if it was in a comparable neighborhood in Toronto it would be $5 million.”

A three-bedroom house in the west end of Toronto hit the market earlier this month, and in just eight days, it sold for more than three quarters of a million dollars over asking. The detached home was listed with an asking price of $1,399,000, and one very motivated buyer picked it up for a cool $2,165,000.

In a recent case, New Era Real Estate sold a home in Mississauga for $2.4 million – a whole half a million dollars over its listing price of $1,900,000.

Beyond the substantial increase in Real Estate commissions there’s the question of the overall housing market in terms of affordability and demand. Again, a historical view.

At the end of WWII the average price of a three bedroom bungalow was about double the average income. For example an electrician I know (a relative) made six thousand dollars a year and paid twelve thousand dollars for his first home, a three bedroom bungalow, just outside Toronto. This also came with a twenty-five year mortgage at five percent. Moving up to that house in 1980, now at forty thousand the average income had increased to just over twenty thousand. Still double. This started to change in 1990 when the average house price rose to about eighty thousand but the average income was only thirty thousand, or about two and a half times. By 2000 the average house price had increased to $165,000 but the average income was now only $45,000, approaching four times, far from double.

Fast forward to today when the average house price in Canada is just above $800,000, and 1.2 million in markets like Toronto and Vancouver. The days of buying a home with one income are long gone so now it’s household income, normally two people. The average income is now close to sixty thousand dollars, so the average house price is thirteen times the average household income. Add that to qualify for a CMHC backed mortgage you now need a twenty percent down payment, so that’s $160,000. A recent study in Vancouver said that the average amount of time it would take for buyers to save for the down payment would be thirty-five years!

No question that housing is now in a state of crisis. The entire model for housing has always been first-time buyers entering the market with their first home which then allowed other home owners to move up in the market, maybe to a bigger home now that they had a larger family, or to a better location, or to own a home with a suite for parents, or one with a separate apartment to rent out to help with the mortgage payments. Without first-time home buyers this whole system will collapse. What’s been driving the dramatic increases in prices, and with all the over asking price sales, has been a combination of low interest rates and low inventories. As rates increase there is an affordability crisis looming and, as happened before in Ontario with what were called zero lot line homes, once home owner’s equity is gone many will just stop paying their mortgage payments, save their money and wait for the bank to take over. Banks aren’t interested in selling Real Estate and just want to recover as much of their money as possible. Dumping all these properties on the market at foreclosure prices will drastically increase inventories and deflate prices. There’s a real danger that Canada could see the same disaster as the collapse in the States in 2008. One property owner I knew personally had his home listed in Lake Tahoe for one point two million but sold it for three hundred and fifty thousand after the collapse. This could happen in Canada if things don’t change. IMHO