REAL ESTATE MYTHS VERSUS FACTS
In Ontario
A 15-minute primer to help you better understand and navigate the housing market
Real Estate Myths versus Facts
Since joining Royal LePage Canada as a Financial Analyst in 2017, I have been fortunate to learn from the best and brightest about many aspects of the Canadian housing market: common valuation techniques used in residential and commercial transactions, brokerage business models and the federal and provincial legislations that shape organized real estate, and the major brands that drive sales activity in various markets across our country. Along the way, when speaking with friends and family about the popular topic of real estate, I’ve encountered many commonly-held beliefs that deserve clarification. In order to be less stressed and more in control of your real estate endeavors, here are a few facts that ought to be known by everyone.
Agents that Offer Discounted Commission Rates Provide Discounted Services
Home prices in Canada have gone up by nearly 50% over the last 5 years, while technological advances have made certain aspects of a realtor’s job streamlined and more effective. By leveraging technology such as digital 3D home tours, online advertising across various real estate websites, and paperless contracts, current home prices mean commission rates can be lower while still providing best-in-class client services and results. No two clients are the same. Some require premium service for their home transaction, while others are comfortable taking a more hands-on approach. Others skip using a realtor altogether and deal in the For-Sale-by-Owner market (think Kijiji, Facebook Marketplace, and homemade lawn signs). Depending on your specific needs, many best-in-class realtors provide cashback to buyers and discounted seller commission rates. Get in touch if you’d like to learn more or get a referral.
A Good Realtor is a Busy One
This is a common misconception even within the real estate profession. In Canada, the top 20% of agents generate over 80% of sales activity, so it is natural to expect a top-producing agent to be most knowledgeable of their local market. However, some top producing agents have simply built a compelling brand and are more motivated by a quick sale than protecting and promoting their client’s best interests. If you’ve been referred to a top-producing realtor or found their name from a billboard, you should still expect them to take the time to meet with you and answer your questions thoughtfully. They should make an honest effort to understand your personal real estate goals, life stage, and financial considerations. Don’t let them attempt to create a sense of urgency to have you sign an agreement with them or move quickly to make an offer.
Keep in mind that home sellers pay the full real estate commission, typically a percentage of the sale price, around half of which is shared with the buyer agent. This means that the buyer agent is also financially incentivized by a higher price. Beware of the realtor that says: “there are multiple offers registered, so if you love the home, you should bid as much as the bank has pre-approved you for”. While certainly a good strategy in some cases, this language encourages quick, emotional decision-making and can result in overbidding, particularly in the Canadian selling format where buyers cannot see the details of other offers (in Australia, the open auction format is how most homes are bought and sold). Rather, your realtor should discuss any purchase opportunity, whether a multiple or single-offer scenario, in the context of your budget as part of taking a disciplined approach. If your realtor is not comfortable or qualified in assessing your financial situation and working with you on a personalized budget, they should be able to refer you to a colleague, mortgage broker, or accountant. To learn more about budgeting best practices, check out our other article here.
Realtors don’t add Value
This is a prevalent and problematic misconception amongst the general population. A good realtor protects and promotes a client’s best interests and can often leverage their local market knowledge to save their client tens of thousands. If you toured homes in your neighbourhood for a living, you’d get pretty good at it too. And as part of their day-to-day, good realtors have a large network of colleagues and third-party professionals to refer to you in the event they are not specialized in your request. A good realtor should always refer you to at least 3 providers. Finally, by working with a realtor, you gain access to the Multiple Listing Service (MLS), which provides maximum exposure through realtor.ca, the most trafficked real estate website in the country, as well as a variety of other partner websites. While many realtors fall short, don’t underestimate the value of a good realtor. Do your homework and work with one that is the right fit for your unique needs.
Canadian Home Prices are Too Expensive and Bound to Crash
This myth is most commonly dispelled amongst younger Canadians, who often lack long-term perspective and have witnessed a steep rise in home prices over the last ten years. In February 2022, the average price of a Canadian home peaked at $817,000. Since then, multiple interest rate increases aimed at reigning in high inflation have increased borrowing costs for homebuyers and resulted in a material pullback in sales activity as well as average prices. To learn more about how interest rates impact home prices and your budget, read my article on Wahi. During the last 3 months of 2022, the average national resale price reported by the Canadian Real Estate Association was $635,700, down 11% year-over-year and 22% from the February 2022 peak. While this seems like a stark indication of what’s to come, short-term price declines have been observed multiple times over the past 40 years despite consistent long-term growth in Canadian home prices. If you plan on owning your home as a long-term investment, take a deep breath and stop paying attention to sensationalized media headings about short-term market swings.
We are fortunate to live in one of the most desirable countries in the world, one of the largest in size with less than 0.5% of the global population. As more and more people try to make Canada their home, our supply of available homes has struggled to keep up. This past summer, the Canadian Mortgage and Housing Corporation published a report that forecasted our country’s housing stock will increase by 2.3 million units by 2030 based on current construction rates. However, in order to achieve affordability for all Canadians, the agency said an additional 3.5 million homes are needed, more than double the current rate. While rising interest rates reduce how much buyers are able to bid for a home, the long-term expectation that demand for Canadian housing will outpace the available supply will continue to place upward pressure on sale prices. Nobody can predict when home prices will bottom out, but if you can begin building equity in a home today, it is highly likely that you’ll be better off in 5 years’ time.
The Price a Home is Listed for is a Good Indicator of What it’s Worth
Listing price is simply one part of a realtor’s marketing strategy. During hot markets, a list price is often set deliberately lower than the home’s fair market value in order to create a bidding war, while other strategies include listing at fair value or much higher. Unlike an appraisal, there are no rules or regulations on how a list price is determined. The correct listing strategy will depend on a variety of factors, and any realtor you interview for the job should be able to clearly explain why they are recommending listing your property at a specific price. Beyond market temperature, other considerations include the list price of other available homes in your neighbourhood, your personal urgency to sell, and the unique qualities of your property.
Private Home Buyers are Predatory and should not be Trusted
Most homeowners have seen, and dismissed, these flyers in the mail: we will buy your home “as-is” for cash! Private or off-market sales account for roughly 10% of the residential market in Canada, and with the rise of the internet and social media sites, this segment continues to become more prominent. While certain wholesalers attempt to buy homes at significant discounts from uninformed owners, many strategic private buyer and investor networks can offer a premium buying a house “as-is” when compared to traditional selling through a realtor which involves the additional cost of commission, in addition to potential staging and renovation expenses. It doesn’t hurt to get as many opinions as possible about your potential home sale. A realtor experienced in your market can give you a good sense of what other comparable properties are selling for, and you can keep that estimate front of mind when you speak with a private buyer about their no-obligation offer to you.
Renting is a Waste of Money
Recent consumer research conducted at Royal LePage shows close to 70% of non-homeowning millennials consider home ownership as important to them, while 51% of all millennials plan to purchase a home within the next 5 years. This is for good reason, but the value placed on homeownership is often associated with the problematic myth that renting is akin to flushing your money down the toilet. There are a variety of benefits associated with renting, both lifestyle and financial. Home ownership costs can be significant, limiting your ability to save and re-invest your earnings. Property taxes, condo fees, mortgage interest, and repairs and maintenance can add up to greatly outnumber the monthly rent for the same property.
While renting itself does not build equity, it can help you achieve a greater savings rate which can be reinvested into stocks, bonds, and other wealth-building investments. Beyond these financial considerations, renting provides significantly more flexibility from a lifestyle perspective. For most standard leases, rent shifts to a month-to-month basis after the first year, allowing a tenant to quickly act on any new opportunities, be it career changes, travel aspirations, or a suitable home available for sale. This intangible benefit offered by renting is different for each person. While Canada and the United States have high homeownership rates of around 67%, there are other developed nations that have leading livability and income equality scores despite having a much larger proportion of its citizens renting. Switzerland and Germany are two such examples, with homeownership rates at only 42% and 50% respectively. Unfortunately in North America, the wealthy renter is a concept not understood by many. To learn more about how to conduct rent versus own analysis, check out our article and supporting calculator here.
People Build Wealth in Real Estate by Selling their Existing Home and Buying a New One
The vast majority of Canadian homeowners follow a standard playbook: buy a starter home, sell in order to buy a family home, before finally selling to downsize (either still owning or a switch to a rental). There is absolutely nothing wrong with this approach, but it does limit your ability to build wealth through real estate. Even if you sell your property at the peak of the market, the next home you buy, if in the same geographic area, will also be priced at a relative peak. If you have significant equity in your home, refinancing in order to keep your current home while buying a rental property is the best way to grow your passive income and overall wealth. As you build equity over time in the rental property, you can refinance again and continue to scale your real estate portfolio. With rapidly rising interest rates like we are currently experiencing, it is important to note that certain periods of time are more advantageous than others when it comes to refinancing. To learn more about selling versus re-financing, get in touch with your bank or mortgage broker.
A Good Realtor can get you the Best Price for Your Home
Beware of the realtor that touts their expert negotiation skills. There is no doubt that many great realtors are great negotiators, but even the best realtor in the world is only as good as the market they operate within. Great realtor or average, the market by-and-large determines the price of your home. When housing inventory (supply) is lower, more buyers (demand) are competing for less homes, driving prices higher. If you have no urgency to sell, stay patient and take steps to get your home ready to list when inventory levels are falling. A good realtor will work to understand your personal situation and make a recommendation based on your unique needs and what they are seeing in the current market.
Commission Rates are Standard in my Market
A realtor can charge you whatever commission rate they want, subject to the policies of the specific brokerage they are registered with and REBBA, the governing legislation for realtors in Canada. In Ontario, the average rate charged to sellers is now between 4% and 4.5% of the sale price, with about half of this amount offered to the agent that brings the buyer (known as the co-operating commission). It is entirely the seller’s discretion as to how much they will offer the buyer agent. When you offer less than the “standard” co-operating commission, buyer agents may discount their rate in order to avoid having their client pay the remaining commission out-of-pocket. If this doesn’t occur, the buyer may be swayed against touring your home altogether or reduce the maximum amount they can offer.
Residential Real Estate Markets are Efficient
Real estate is an illiquid asset, with properties trading hands once or twice every decade (or even less) compared to stocks and bonds, which are traded daily. Homes often have significant differences in quality of construction materials, renovations, and location specifics such as zoning and other municipal developments. Finally and most importantly, they also involve homeowners who place varying levels of sentimental value on certain properties. It is important to remember that where you live has a real benefit beyond the financial return on investment and that this intangible benefit is different for each person. Mispricings often occur and a good realtor can help you avoid or take advantage of them.
You Need a 20% Downpayment in Order to Buy a Home
In recent years, there have been a variety of government measures enacted to safeguard the health of the Canadian housing market and increase affordability for Canadian citizens. When coupled with varying provincial initiatives, it is undoubtedly hard to stay on top of. Today, a 20% minimum downpayment rule only applies for homes priced above one million dollars. In Ontario, starting in 2016, the 5% minimum downpayment was updated to a tiered structure, with 10% required for the portion of the home priced above $500K. So, for an $800K home, the minimum downpayment would be $55K, or 5% of the first $500K plus 10% of the remaining $300K. A 20% downpayment is commonly confused as a minimum because of mortgage default insurance, which must be purchased for any property paid for with less than 20% upfront. However, for a home priced at $999K, you can purchase it for as little as 7.5% down (plus mortgage default insurance). When compared to waiting potentially years to save up a 20% downpayment, buying today at a lower minimum is often a financially wise decision. Mortgage default insurance can be wrapped into your mortgage payments, with premiums ranging from 0.6% to 4.5% of the purchase price based on the downpayment amount. You can learn more about minimum downpayments and mortgage default insurance by visiting the Government of Canada’s page here.
Home Staging and Renovations always provide a Return on Investment
Whether it be home staging, the frequently touted best renovation of a kitchen makeover, or cost-effective painting, the simple truth is that it is next to impossible to determine what the true return on investment is for any value-add project. This is because despite knowing exactly what your project costs were and what your home ultimately sold for, you will never know what your home would have sold for had the project not been completed.
The best recommendation your realtor can give you is one based on your unique property and situation. If your home is clean, decluttered, and modern, home staging is likely not needed. If you are handy and can perform a renovation without incurring significant labour costs, then many projects can increase the value of your home sale above and beyond the associated costs. However, each buyer is different, with many preferring to buy a “fixer-upper” in order to do any work themselves that fits their vision for the property. If you want to spruce up your home before you list, the safest bets for value-add projects are often painting, decluttering, and minor outdoor landscaping. When you interview a realtor for the privilege of listing your home, they should be able to provide a personalized recommendation for your home to optimize its value, and your take home profits, for the current market conditions.
Questions or comments? I’d love to hear from you!
Thank you for taking the time to read this article. As you contemplate the next steps in your real estate journey, there are a variety of helpful online resources you can leverage, such as realtor.ca, the Canadian Mortgage and Housing Corporation, and historical sales data and market insights from real estate websites like Wahi, HouseSigma, and Zolo.
ABOUT THE AUTHOR
John Peloza has held his Ontario Realtor® license since April 2021 and has held the Chartered Financial Analyst® designation since 2018. Upon graduating from the Ivey School of Business, John spent time in market research and consulting roles before beginning his career in real estate in 2017 as a Financial Analyst with Royal LePage Canada. During his time at Royal LePage, he has supported on consulting engagements with parent company Brookfield, culminating in a secondment at digital brokerage start-up Wahi, which has been based in Toronto since November 2021.
John's primary markets of interest include the Toronto harbourfront, Liberty Village and Queen West neighbourhoods, his hometown of London Ontario, and the Leamington-Kingsville region of Essex County. He is passionate about real estate, wealth management and personal investing, and helping clients achieve their goals through education and expertise.
