The buyers have returned!

But they are not acting like you'd expect they would. Published Sept 2024

One of the major questions and anticipations since the start of the rate-cutting cycle has been: “When will more buyers return?” As carry costs decrease, there has been significant expectation that demand and activity will increase. However, this has been somewhat overhyped by some in the real estate industry. Many believed (or hoped) that the onset of the cutting cycle in June would immediately trigger a surge in demand similar to what we saw in 2020. While this has not happened as of yet, there is evidence that many new buyers have begun their home search.

However while activity appears to have increased, new buyers are acting the way they always do at the beginning of a property search, which is with extreme hesitancy. In addition, changes in the overall market psychology as well as current buyer preferences are keeping prices subdued.

New Buyers Emerge

Although it’s still early in the fall market, all meaningful activity metrics have seen a notable uptick. Showings, offers, and sales have all risen significantly compared to trends from the past few months (see the charts at the end of the article for tracking these metrics).

Anecdotally, I can report that open houses are busier, and some new listings are attracting a large number of showings. Speaking with mortgage brokers and other agents, there has been an increase in inquiries from new buyers. Three-year fixed-rate mortgages are now at or below the rates from the spring of 2023, which was the hottest period since interest rates rose in 2022.

Despite this apparent increase in activity, sale prices have not risen and remain within the same range we've seen since the spring.

If activity is up, why aren’t prices rising? Is it simply too early in the fall season to detect a new trend? Is there too much inventory for sale? Or have rates not dropped enough to ignite a rally in prices? What the activity stats don’t reveal is that new buyers are behaving as expected, just not as many had hoped. Instead of a new frenzy, we’re seeing a lot of indecision, except in a small segment of homes.

The Education Phase

The reality is that new buyers take time to become educated and comfortable with how the market works. The home-buying process is not only complex but often the largest financial transaction a person will make. On top of that, buyers need to figure out where they want to live and how their budget aligns with available properties.

The education phase for new buyers can be lengthy, as each buyer approaches it with different levels of knowledge. Here are some key considerations they need to address:

• Market Research: Understanding price trends, inventory levels, how long homes stay on the market, and factors influencing future market conditions.

• Needs Assessment: Identifying must-haves versus wish-list items, and considering long-term plans for family or work.

• Neighborhood Evaluation: Assessing amenities, schools, transportation, safety, and proximity to family. Does the budget meet both needs and wants?

• Financing: Understanding mortgages, determining how much one can borrow versus how much they are comfortable borrowing.

• The Home-Buying Process: Selecting an agent, making offers, navigating multiple bids, handling home inspections, appraisals, and closings.

• Legal Considerations: Choosing a lawyer, addressing title issues, rights of way, and easements.

• Home Knowledge: Gaining a basic understanding of elements like roofs, furnaces, foundations, electrical, and plumbing systems.

Every buyer goes through the education phase at their own pace. Some are ready to make offers quickly, while others take more time, cautiously easing into the process. It’s not uncommon for some new buyers to need to see dozens of houses in many different neighbourhoods before even making the step to making their first offer.

Risk Aversion

Regardless of the timeline for education, new buyers are also often extremely risk-averse. This is a normal part of the learning process. Buying a home isn’t just a financial transaction—it’s a deeply personal milestone that blends things like family, money, self-worth, personal goals, and future plans.

There is often fear of the unknown, the possibility of making a bad decision, and financial anxiety. At the same time, the emotional pull of finding a home can conflict with rational considerations. Balancing the emotional desire with the need to make a sound investment can lead to second-guessing and hesitancy. Buyers often work through this by making tentative offers at first, frequently below market value, with many protective clauses.

Buyer Psychology

In the previously aggressive market before 2022, new buyers quickly learned that they had to act more aggressively to compete and win. The education phase often needed to be rushed, and in hindsight, many homeowners now regret this, as they face negative equity, extended amortizations, and high mortgage costs.

However, now that the market has slowed, prices have fallen, and everyone is aware of the negative stories, being cautious and underbidding on prices is a very sensible reaction. Buyer psychology has shifted from an insatiable, overstimulated hunger to a far more cautious tone. New buyers, already hesitant, no longer feel the added pressure to catch up to a rapidly advancing market. Ironically, the type of home most active buyers seem to want is still hard to find, but the mindset of extreme scarcity and FOMO has dissipated.

Buyer Preference:

One trend we’ve observed over the past few years is active buyers' preference for high-quality, fully renovated homes. Location and price are still the most important factors determining whether a home will sell, but even in premium areas, there is a massive disparity in demand, activity, and sale price between renovated and non-renovated homes. Moreover, the difference between these factors is much greater than it used to be.

If a home is highly renovated and stylish, buyers show up and are often willing to enter bidding wars or pay top dollar for the property. Despite the general malaise in the overall market, it’s still fairly difficult to find a home that ticks all the right boxes.

However, homes that are even slightly less renovated or need a few updates sell at a far greater discount than the cost of renovation. If a house isn’t perfect, it sits on the market for longer, struggles to sell, and typically must lower its price repeatedly to attract buyers.

The reality is that high-quality, renovated homes are rare in most Toronto neighborhoods. These homes do sell quickly and for good prices, but the rest seem to meet indifference from active buyers. I have more in-depth thoughts on why this is, but I plan to explore them in a separate article.

Conclusion

It is still unclear how the continued rate cutting cycle will affect Toronto housing. What is clear is that buyers are approaching with caution and deliberation except in rare instances for exceptional properties. While activity has picked up, new buyers are still going through a critical education phase. The shift in buyer psychology from the urgency of previous years to a more hesitant approach reflects both a natural response to market conditions and a desire to avoid the mistakes of the past.

I am personally skeptical that the overall market will experience a sudden urge in prices this year. There are still big pockets of oversupply in many segments of the market and with cautious buyers being the dominant force it just seems there is a big divide between demand and supply. As the fall market unfolds, it will be interesting to see if these trends persist or evolve in response to broader economic changes.