Why do home sale prices exceed the listed ones in Canada?

Growing real estate prices often mean that properties are being sold for a price exceeding the listed one significantly. As a result, potential buyers and real estate specialists can’t figure out what price to offer.

Determining the right offer price becomes even more difficult when sales transform into real auctions. Houses in high-demand markets are sold right on a day the offer is made, with buyers forced into blind auctions.

Certain properties in such markets, e.g. a cottage north of Toronto, have been sold for twice the listing price. Recently, a home in Toronto was sold for more than $1 million over the list price.

While many believe the reason for that is the combination of low interest rates, a high demand and a restrained supply, this is not fully true, as it would mean that sellers can’t understand what price to set for their homes.

“Earlier, the list price was one of the most important factors, as it pointed to the seller’s expected price,” – says Mustafa Abbasi from Zolo.

Now, some sellers may list their homes at a lower price in attempt to attract more buyers and encourage the bidding wars. According to Abbasi, realtors today often advise their clients to list below market value to achieve this goal.

It turns out the real estate markets have not reported such a crazy activity and strong speculation in the past. In 1992, an American economics professor Joel Horowitz noted that properties are usually sold at prices below, but rarely at prices above their list prices. He added that the list prices were a price ceiling signal for buyers.

Moreover, we can see sales data for Toronto in 1995 showing that only less than 2% of low-rise houses were sold for more than their list price. The average sale-to-list-price ratio (SLR) was 99%.

The market is driven by seller and buyer expectations. According to finance professor John Knight, list prices are higher when they point to the seller’s intent. Meanwhile, they are lower in case of a market driven by buyers’ desire to make a purchase.

It looks like today’s market conditions represent buyers’ unrestrained willingness to purchase. Recent research proves that buyers’ bidding wars increase a gap between list and sale prices, and such behaviour varies depending on the market cycle. University of Ulster professor Stanley McGreal noted in 2010 that two quarters before real estate prices reached their peak in 2007, the list prices in the U.S. exceeded the sales prices by 12%. Following the peak, the sale prices led list prices.

The situation we’ve seen in Canada is quite similar. In March 2021, the SLR in the Greater Toronto Area reached 107%. Homes here were sold within 13 days after getting listed. Just before the market peaked in Toronto in March 2017, the SLR went up to 111%, and homes were sold within 10 days.

Then, after the peak is over, the SLR goes down sharply. Look at the weak real estate market in August 2017 when the SLR in Toronto fell to 98%.

So what does it all mean for Canadian buyers? It means that the buyers’ desire and readiness to spend more than others lead to transactions in high-demand markets with sale prices exceeding the list prices significantly.

That’s why it’s vital for potential homebuyers to be extremely careful, as even economic theory or realtor’s experience can’t guarantee you help when homes are sold for hundreds of thousands of dollars more than listing price. In some cases, it may be more reasonable to wait for the right home and the right time with a more balanced supply and demand conditions.