Ottawa Real Estate Monthly - September 2023

Sales of homes and condos continue to stagnate due to the rapid rise in interest rates over the past year; when you look at the statistics, this is a pretty big story. But it's not the only big story in the real estate world. Changes to the regulations governing Realtors that will come into effect in December might not sound like an interesting subject if you aren't a Realtor - but these changes are a significant step forward and will manifest in some interesting ways, both intended and unintended, for people buying or selling properties in Ontario. I'll outline the changes and how they may impact your next purchase or sale - what you should be aware of and how to prepare.

Snapshot

Home and condo sales year to date at the end of August were 8% and 5.6% lower than in 2022. In 2022, sales by the end of August had reached their lowest level in over 5 years and began falling further off pace in the Fall. Looking at the snapshot table below, sales for the month of August were 12.3% and 17% (homes, condos respectively) lower than August 2022 - not the recovery trend we would hope to see.

The double rate bumps of .25% in June and July came as a surprise to many people and are likely the primary reason sales turned further South over the Summer.

I'll reiterate that the root cause of the massive swings in the market we've seen over the past 4 years were the unnecessary cuts in interest rates in March of 2020, sustaining an ultra low rate for two years, and messaging suggesting rates would not rise rapidly "ever". In other words, yes, I'm a Realtor stating that unnecessarily low interest rates were the problem.

However, given that policy error, hammering the market as the Bank of Canada has to try to correct things has been equally unnecessarily punitive. It was small but welcome news this week that the BOC held at 5%. If they have the wisdom to let the impact of higher rates work their way through the economy over the next 12 to 18 months, holding rather than continuing to hike, people may gradually become more comfortable buying and selling homes.

Key Statistics

The pace of sales (average number of homes and condos sold per month over the past 12 months) is running about 50% below the ultra-low-interest-fueled peak reached in 2021. The middle, moderately climbing curves of 2018 and 2019 illustrate "normal" market behaviour. The Bank of Canada drove us well above that (2021 green line), then sent us into a nose dive (2022 red line).

The pace of sales appeared to be stable and gradually starting to recover from April through July. I wonder if the Bank of Canada is watching this graph and decided based on this slight incline to increase rates in June and July, causing the setback in August? If you look closely, August's decline as observed in the snapshot at the top of this newsletter is visible in the blue 2023 curve above as a levelling off or slight dip after three months of cautious climbing.

OK, I'm joking about the BOC consulting my graphs to set policy. But it's interesting how quickly the impact of rate changes is reflected in the above statistic, which is a measure of long term trends.

Ottawa Price Growth vs. Other Cities

We know that house prices in Ottawa and across Canada escalated sharply from 2020 through early 2022, receded somewhat, and since early 2023 have been relatively stable.

I thought it would be interesting at this point to look at how Ottawa house prices have change compared to other cities in Canada and within Ontario.

For this comparison, we'll use MLS HPI (Home Price Index) metrics that represent normalized prices. The normalization methodology attempts to adjust for differences in housing stock, so that we aren't comparing the price of a 3,000 square foot mini-mansion in one location with a 900 square foot bungalow in another, for example.

Pre-Pandemic To Today

First up, we look at the end result of all the turmoil to date. The chart below shows how much prices increased in several key Canadian and Ontario Cities, as well as in Ontario overall over the 4 year period beginning before the steep drop in interest rates and ending after 10 successive rate hikes: from July 2019 to July 2023.

Observations

• expressed as a percentage of pre-pandemic prices, it seems that markets we think of as more affordable experienced the most price escalation: London / St. Thomas, Kingston, Montreal.
• prices in Ottawa grew slightly less than the Ontario average, and almost exactly the same amount as Toronto

Since The Middle Of The Pandemic

Next we look at how much of the price growth over the past four years occurred in the second half of that time frame, which includes roughly the second half of the pandemic.

Observations

• Stepping a little over a year into the pandemic, the first two charts illustrate that most of the price escalation in Ottawa was in the books. Prices from July 2021 through July 2023 rose 3.4% in our City. (A small portion of the total 52.5% increase over four years.) This might seem to conflict with observations made through the second half of 2021 and the first half of 2022 when prices continued to rise sharply.
• There is no contradiction, however; what this shows is that the sharp gains made during the second half of the pandemic have been largely erased since rates began rising.
• Most cities were more or less in line with Ottawa, with most of the retained price growth having occurred in the first half of the four year window. Toronto and Calgary are the notable exceptions - especially Calgary where 22.1% of the 35.8% total escalation occurred in the second half of the period we're analysing. Price escalation in Calgary took longer to ramp up.

Post-Pandemic Price Growth - Or Regression

The final percentage growth chart shows price change over the past year; that is, roughly since the end of the pandemic and since the Bank of Canada started raising rates aggressively.

Observations

• price growth by city over the past year has almost inverted compared to total growth experienced over the past four years, with traditionally higher priced markets like Toronto and Calgary growing more and more affordable markets growing less or depreciating
• Calgary was late to the price escalation party but prices are now climbing there more than anywhere else, despite rate hikes; you may have read that people from other parts of Canada have been moving to Calgary, pushing up demand. One of the main reasons for this inter-provincial migration trend? More affordable housing. I guess that will be true until the surge in demand defeats its cause.
• traditionally, the Ottawa real estate market has been one of the most stable in North America, somewhat immune to strong price peaks and troughs. This time around, prices in Ottawa increased more than we typically see. The city's economically conservative nature may have kicked back in, explaining the strongest regression from peak prices compared to other markets.

Benchmark Prices

Percentage changes in benchmark prices in various cities and regions allow us to compare price escalation relative to baselines; but it is also interesting to look at absolute benchmark prices. Regardless of whether prices have escalated more in London & St. Thomas than they have in Toronto relatively, homes in Toronto are still way more expensive than in London.

How do Ottawa house prices stack up? Are they starting to approach Toronto prices? Is Ottawa way more expensive than London, Calgary, or Victoria?

The table below shows HPI normalized house prices in the various cities and regions used in the above graphs. Spend a few minutes looking at the progression of prices over the past five years - this puts some hard numbers on the percentage changes over time.

Realtor Rule Changes & What They Mean For You

The Real Estate and Business Broker's Act (REBBA) of 2002, updated from time to time, has been governing the practices and ethics of Realtors for over 20 years. Over the past five years, these regulations have been under review in preparation for substantial changes.

The Act is going to be renamed the "Trust in Real Estate Services Act" (TRESA) and a significant phase will be enacted December 1st of this year. Updates to the regulations under REBBA over the years have been minor and not generally perceptible to consumers. The changes coming in two months will have a tangible impact on your real estate buying and selling experience working with Realtors.

Some of the changes are directly in line with my thinking and I'm pleased to see Ontario moving the industry in the right direction. I've developed some ideas for change in the industry and I've toyed with building a web application based on the principles of an open market, equitable trading practices, and transparency. The new regulations go part way and might enable the project I have in mind; or perhaps the systems provided by organized real estate in Ontario for Realtors will begin to evolve in the direction I have in mind as a result of the December and future rule changes.

While the changes in behaviour the new regulations are intended to produce are positive, undoubtedly many practitioners will not fully grasp or implement them and may continue to behave antithetically. There will also be changes in behaviour that I imagine are unintended; it will be interesting to see how the industry and regulators react once they see the results.

I'll go over a few of the highest impact changes below, and provide some thoughts on how they will impact you when buying or selling real estate, including intended and unintended behaviours for you to consider.

Self-Represented Parties / No Customers

A core principle of the real estate trading system I have been envisioning comes to life under the new regulations: each party to a transaction (i.e. the buyer and the seller) will now be either self-represented or represented by a broker (I'm going to use the word broker in place of and meaning the same as "real estate agent", "agent", or "brokerage").

Currently, under REBBA, consumers can choose to be "customers" and brokers can provide "customer service" to consumers who elect not to hire the broker to represent them. This means, for example, a broker can show you houses listed by other brokers and help you with the purchase process without entering into a representation agreement (written or implied) and without assuming fiduciary responsibility. This consistently leads to ambiguity, problems, disillusioned consumers, and law suits.

Under the new regulations, you will either hire a broker to represent you, or you will represent yourself. If you choose to represent yourself, a broker will be prohibited (the precise word used in the regulation) from providing you services, privileged information, or advice. A broker may interact with you in service to their client: for example, a broker may show you a home they have listed, as a service to their seller client, if their client sees value in this service.

Brokers will not be obligated to provide any service to a self-represented party. What does this mean for you? Some examples:

• you may not be able to see that house you're interested in if the seller's broker feels it is not in their client's interest to show you the house
• a broker is not going to share comparable sales information with you if you are not their client

Why is this a good idea? The first reason is that it removes all ambiguity that arises when brokers try to serve a customer while representing a client in a transaction or in any work in anticipation of a possible transaction. It empowers (and forces) brokers to work in their client's interest, where currently many seemingly beneficial or innocuous practices actually work against a broker's own client.

The second reason is one that the regulators do not, to my knowledge, intend or anticipate. This reason is one of the core principles of the real estate trading system I envision. Delineating represented and self-represented parties paves the way for the decoupling of service fees from property prices. In my view this is one pillar of a new system that would reform and transform real estate trading, eradicating collusive broker behaviours while advancing the valuable services brokers provide. It will reward professional behaviour.

Documentation of Representation Fees

The new regulations mandate that representation agreements identify?any circumstances?in which broker fees payable might change and, for each circumstance, an explanation of?how?the amount might change, and an indication of whether one or more brokers may receive compensation.

This has been my standard practice for about 10 years. My agreements outline various scenarios in which my fee will be discounted, and how cooperating broker fees may or may not change in competitive or other scenarios.

It is currently common practice for brokers to "make it up as they go along" offering discounts or otherwise changing fees payable based on circumstances that arise in order to expedite a transaction or favour one party over another (the latter being against current regulations, but enabled by lax documentation requirements and enforcement).

This new requirement also helps set the stage for fee transparency and decoupling, while that is likely not an intended benefit. I see no sign the industry is heading in that direction.

Sharing The Content Of Competing Offers

This is the change that will be the most visible and is set to potentially prove the adage, "be careful what you wish for", to those who've been blaming price escalation on the closed offer process enshrined in current regulations and practiced for decades.

Under the new regulations, at the decision and written direction of the broker's client (the property owner), the seller's broker may reveal the content of a buyer's offer to all buyers making a competing offer.

The seller decides what content - what terms of the offer - can be shared. No identifying information is permitted (the buyer's name, address, etc.). The seller may instruct his broker to share price, conditions, closing date, inclusions & exclusions, etc.

Furthermore, the seller may change his direction at any time, in writing. This means the seller may begin the offer process giving instructions to follow current closed offer procedures, not sharing any information about one buyer's offer with another buyer; but may later change his mind and instruct his broker to share some terms of the offers.

What does this mean for you? I'll hit the most important considerations:

As A Seller

If you are selling your property and expect to receive or in fact receive multiple, competing offers, you will have to decide whether it is in your best interest to "open up" the process and share some of the terms of each offer with all buyers making an offer.

You'll have to decide what you think is to your advantage, and whether your broker's recommendations on the subject are reliable. Hiring a broker with strong critical thinking skills will be more important than ever.

Is it better to let each buyer independently evaluate your property and bring his or her best offer to the table, given the pressure they are under with the knowledge of how many offers are on the table but not knowing the terms of any of those offers? This model, the current "blind bidding" model, sometimes results in one offer exceeding all other offers in price by a wide margin. If you share the price of competing offers with all buyers, there is no need for the highest bidder to far exceed the second place bidder. You may sell for a much lower price than you could have. You may also scare off numerous buyers who've made offers that are not in contention with the top two or three offers. That could be good or bad, depending on what you're measuring.

On the other hand, under the current "blind bidding" process, often buyers are left disappointed when they don't offer enough to "win" the competition. They find out that the highest offer didn't exceed their offer by much and they wish they had offered more. In this scenario, if you as the seller share the price of each offer with every buyer, you may achieve a higher sale price from the buyer who otherwise finished a close second in the closed offer case. You have to think, though, that such a buyer was probably close to their limit the first time around. How much more will they likely pay? Will that margin exceed the potential margin between first and second place in a closed offer process?

Then again, in the heat of the moment, in an open, auction style bidding war, might that second place buyer and other buyers get carried away and agree to pay more than they otherwise would? See my thoughts on the unintended consequences of sharing offer contents, below.

As A Buyer

Interestingly, the regulations are being changed primarily as a result of media pressure on behalf of consumers as part of the outrage over escalating house prices. Fundamentally, the changes are being made in favour of buyers, not sellers. For that reason, one can argue it is appropriate that the prerogative is being given to sellers, since presumably the open offer process works against them if it is for the benefit of buyers.

As a buyer, do you want to know the terms of other buyers' offers on a property you've offered on? In most cases, you'd probably say yes you do. I've worked with many buyers who, in contemplating an offer on a property, lament that they don't know how much they need to offer to "win". This kicks off an exchange about objectively evaluating the property, making a prudently strong offer, and living with the results.

Perhaps the more important question about the open offer process as a buyer is, are you happy to share the terms of your offer with other buyers? It is a two-way street after-all. And in reality, when the market heats up or you find that extraordinary property that everyone wants, it's a many-to-one-way street. You'll be sharing your offer terms with possibly 3 or 4, or 8 or 9 other buyers. What's the chance someone who may not have outbid you blindly will outbid you now?

Unintended Consequences

Whether you're for or against the introduction of offer term sharing - a more open offer process - there are new behaviours and considerations that are likely unintended. I wonder if they are unanticipated?

Buyers may make an offer under the assumption the terms of their offer will not be shared, either because they are not properly informed by their broker about the new regulations or because the seller's broker states that a closed offer process is being used, but the seller subsequently changes her mind and instructs her broker to share offer terms.

In the current closed offer system, buyers essentially put their best foot forward and the seller chooses the offer they find most acceptable. Sometimes there can be a little bit of back and forth with one or a small subset of the offers made on a property, but in most cases each buyer makes an offer, improves it based on the number of offers in play, and then finds out their offer was accepted or not.

In an open offer system, the seller's broker will share with every buyer the terms of other offers. Any buyer learning that their offer is not the highest, but who is willing to pay more, will presumably immediately or before any stated deadline, improve their offer. Having done so, all other buyers will be told of the new best price. This will then lead one or more other buyers to improve their offer. I see no reason this process might not repeat itself dozens of times over, in the fashion of an auction. What would stop it would be one buyer far exceeding all other offers, which perhaps they may do to "stop the game" and win the day. But why pay more than you need to?

Offer day behaviour is likely to change dramatically, in ways that I'm not sure are intended or desired. Consumers who didn't like "bidding wars" in the current closed offer system, and the media who hungrily report on this sensation without critically assessing the alternative, may be in for an unpleasant surprise.

Thank You

Thank you very much for reading my newsletter.

Is someone you care about thinking of moving or investing?

I?would love to help.?If you feel comfortable introducing us, please do.

Bruce Brown, Real Estate Broker, Certified Executor Advisor

OttawaAgent.ca

RE/MAX Hallmark Realty Group, Brokerage