The Overheated Real Estate Market of Quebec - APCIQ - Site web

The Overheated Real Estate Market of Quebec: Issues and Consequences

The Quebec Professional Association of Real Estate Brokers (QPAREB) released an important study on the overheated real estate market of the province during the pandemic. This document, which contains an in-depth economic analysis of the real estate market boom, was submitted to Quebec’s Minister of Finance in response to the public consultation they initiated.

Overview of the Situation

Quebec’s Pre-Pandemic Real Estate Market

Since 2015, in addition to households increasing their purchasing power, and homeownership incentives, the rising housing prices have been triggered by a tightening of the market, linked to increased migration flows, and to the 25–34-year old’s desire to purchase property. This group, composed mostly of first-time buyers, is generating demand while further reducing the number of available units by removing available property without putting another one back on the market.

In 2019, market conditions in Quebec favoured sellers. The number of transactions in the real estate market exceeded the 96,000 sales threshold, up 11 per cent from the previous year. During the same period, the number of active listings recorded on the real estate brokers’ Centris system was 56,319, down 12 per cent from 2018. By the end of 2019, the Montreal Census Metropolitan Area (CMA) was approaching the exuberance phase, characterized by higher drift risks.

The 5 Main Challenges

Understanding the Overheated Real Estate Market

The pandemic accelerated an already destabilized market. Its nature created the many shockwaves of a financial crisis, catalyzing the residential market and generally tightening market conditions.

Additionally, the health crisis accelerated the implementation of remote work, modifying residential preferences. This sense of urgency accelerated the property prices’ rise. Quebec’s market entered a period of euphoria, characterized by an acceleration of the rising prices and a market drift, overbidding being the first manifestation of this period.

1. Unprecedented Surge of Overbidding

  • Behavioural economics provide a relevant framework for the analysis of the housing market. Based on a relatively recent study, several notions were put forward, including overconfidence (buyers’ expectations of the price changes), social influence (the influence of family/friends, real estate experts and the media on buyers) and self-control (the buyers’ ability to respect their budget and not to let themselves be dragged down in an overbidding dynamic). The purchase of a property requires the consolidation of information from a variety of sources. This consolidation can easily be biased by emotions. Emotions came to play a predominant role during the health crisis.
  • A CMHC survey revealed that first-time buyers tended to be more emotional during the transactional process. They are therefore the most impressionable buyers and those who typically end up exceeding their budget.
  • This behaviour was certainly exacerbated during the health crisis, as evidenced by the historic proportion of overbidding in Quebec over the past 12 months.
  • This dynamic was undoubtedly reinforced by experienced buyers who also acted as sellers to first-time buyers. These first-time buyers were also caught up in overbidding and their emotions, with the expectation of price increases rationalized by the lack of properties currently for sale on the market.

2. Decrease of the Inventory

In 2019, just prior to the outbreak of COVID-19 in the province, the number of transactions in the real estate market exceeded the threshold of 96,000 sales, 11 per cent more than the previous year, while the number of active listings registered on the real estate brokers’ Centris system was 56,319, down 12 per cent compared to 2018. Consequently, the Quebec real estate market entered an expansion phase and the number of months of inventory has been steadily declining, more so in metropolitan areas, where the number of months of inventory reached 5 months before the pandemic.

This gave sellers a clear advantage and price growth had already begun to accelerate.

The COVID-19 pandemic and the change in buyer-seller behaviour exacerbated this phenomenon, creating a surge in demand, a rapid increase in prices and a decrease in the available inventory.

3. Lower Interest Rates

  • Low interest rates play a major role and greatly facilitate affordability
  • Market rates have been at historic lows, although qualifying rates (inherent in the “stress test” rules instituted since 2016) have not been following the same trend
  • Thus, the posted Bank of Canada 5-year variable and fixed-term mortgages of 4.79 per cent were, at the height of the health crisis, at a higher level than during the 2008 recession
  • However, the average ratio between the monthly cost of a mortgage and the personal disposable income of Quebec households fell by 22 per cent in 2020 compared to 2019, before rising again in 2021. This is a historically low level despite the sharp rise of prices in 2020.

4. Rising Property Prices

  • The lack of supply of residential properties, combined with strong transactional activity, has put significant upward pressure on real estate prices. This phenomenon, which was already observable in recent years, has been exacerbated with the pandemic.
  • Quebec’s market has entered an “exuberance” or “euphoria” phase involving an acceleration of price increases and situations of market drift, of which overbidding is the first manifestation.

5. Changes in Buyer-Seller Behaviour

Despite all the pressure, warnings and advice from brokers, the overheated context highlighted two atypical behaviours, among both sellers and buyers. Motivated by health concerns, sellers showed a strong reluctance to have buyers walk through their homes, even though these visits are critical to the success of a sale. This reluctance was equally pronounced on the part of tenants when rented units were included in the sale.

On the other hand, motivated by their own housing needs and hoping that their promise to purchase will be kept, buyers have been prone to overbidding and waiving important contractual and legal protections, such as the legal guarantee of quality, or skipping important steps such as the pre-purchase inspection. We also saw households redefine their lifestyle, choosing different environments.

With the arrival of the pandemic, the pressure on many buyers increased, exacerbated by changes in consumer behaviour and the widening gap between supply and demand. On top of these issues, there was the unusual context in which both buyers and sellers were operating, due to the health issues at stake.

Some were forced to postpone their project and others had to rethink the amount to invest and the financial planning for the purchase of their property. Motivated by the need for housing or relocating, buyers chose to compete with each other. Getting multiple offers is becoming commonplace and brokers are suddenly supporting their clients in a never-before-seen context.

Anxious that they will not be able to complete their transaction, buyers forgo essential protective measures, despite the advice of their broker: pre-purchase inspection, legal warranty and certificates of location, provided that the lending institution or its accredited appraiser accepts the amount offered. There is reason to believe that the buyer feels reassured when it has been confirmed that the waivers and conditions contained in the offer will not hinder them from obtaining their financing and that the offered price reflects the market value of the property, according to the standards of professional practice set by the Ordre des Évaluateurs Agréés du Quebec (OÉAQ).

Our Initiative

The Real Estate Broker’s Role

The broker’s role is to accompany their client and facilitate real estate transactions in keeping with the goals of the client and in accordance with the terms of their brokerage contract. The decision-making process is always the client’s responsibility. As part of their contract, the broker seeks to obtain the best price and the best possible terms. Not seeking to optimize the outcome of the sale would be tantamount to a breach of their obligations. The broker could even be subject to ethical complaints and civil lawsuits.

It is essential that the broker’s mandate stays intact to ensure that the interests of their clients are protected as they proceed with what is, for many, the most important transaction of their lives.

With the pandemic, multiple offers became commonplace and, despite warnings and advice from brokers, the overheated market highlighted two atypical behaviours. Sellers (and tenants) were reluctant to have buyers walk through their homes.

During this perfect storm, brokers wanted to safeguard the interests of their clients and advise them on important choices such as budgeting, protection or even the acquisition of property. Despite the constraints that made their work extremely demanding, professional brokers assisted 69,758 buyers and as many sellers in closing a transaction during the first two quarters of 2021. That’s a 32 per cent increase from 52,823 during the same time frame in 2020. That’s 15,000 more buyers who, despite the overheated environment, were able to complete a transaction and thus find a home. And 2020 was already a remarkable year!

Satisfaction with Real Estate Brokers’ Services

The QPAREB mandated the Léger company to conduct a study on the perception and satisfaction of Quebec’s property buyers and sellers regarding brokers and the real estate market. Satisfaction with a broker’s work was high for both buyers and sellers who closed a real estate transaction between March 2020 and July 2021. It was respectively 88 per cent and 89 per cent.

Furthermore, the survey results show that respondents do not consider the role of the real estate broker to be an important or significant factor contributing to the overheated market.

Prospects and Solutions

Our Recommendations in 5 Categories

1. The Real Estate Broker Profession.

Promoting and Protecting Informed Decision-making

The process surrounding real estate transactions is based on the parties’ willingness to find a perfect compromise. To mitigate irrational behaviour during the negotiation process, the QPAREB recommends that awareness-raising efforts be stepped up for both buyers and sellers. The Association proposes four interventions:

–Develop more informational and educational content and leverage the technological expertise and tools of fellow industry members, such as Centris.ca, to disseminate the information.
–Collaborate with industry partners: the QPAREB intends to offer specialized educational and informational content that has been developed with the help of experts.
–Connecting Quebecers with professionals and other actors: the QPAREB wants to standardize and normalize this process.
–Insert additional disclaimers in transaction forms: the QPAREB recommends that the OACIQ include visible disclaimers in various contracts and forms. The most important issues are related to the waiver of the legal guarantee of quality and the update of the certificate of location.

Assist and Equip Brokers

The QPAREB proposes solutions to further support certain aspects of the work performed by brokers.

–Introduce monitoring tools (checklists): the QPAREB offers to provide its members with a monitoring tool to follow the user throughout the steps and decisions they must take. This tool will ensure more transparency and, most importantly, document the follow-ups. Many brokers are already using similar systems. The practice would not be new, but it would be standardized.

–Offer specialized training to brokers so they learn to use the tools they have available to them. In addition to the specialized diploma they must obtain, and the continuous training they must attend, the QPAREB proposes that familiarization courses should be offered so brokers get used to their new tools.

The QPAREB also intends to examine the various stages of the transactional process in greater depth in order to identify more structural solutions. The QPAREB has already set up a round table bringing together the various players of the real estate sector. Together, they aim to protect the access to property.

2. The Compensation Model

The broker compensation system currently in place is the most suitable one. Compensation models are in keeping with the will and interests of their clients, regardless of whether they are buyers or sellers, and the compensation paid to the seller’s broker did not contribute to the overheated market.

We must be careful not to change a working model that meets the best interests of the clients and encourages a diverse range of combinations of offers and remuneration, while respecting the principles of a competitive market.
In Quebec’s real estate brokerage sector, compensation models are subject to the Competition Act. Under this law, brokers offer different types of services, and the compensation varies accordingly. The compensation, established in a comprehensive brokerage contract, is generally calculated based on a percentage of the sale price or on an agreed upon fixed sum.

Therefore, real estate brokers are entrepreneurs. Our 14,000 real estate brokers from nearly 1,000 agencies differentiate themselves by offering services tailored to their clients’ needs, and their compensation reflects this. Each client will find a solution that meets their specific advice needs, to orchestrate each stage of the process and to take care of the entire marketing process.
The real estate broker is also a risk taker. Our analysis indicates that homeowners prefer to have their broker take the risk on their behalf. They are thus risking their investment of time and money.

Finally, in most transactions, the seller’s broker splits the compensation received from the sale with the buyer’s broker. The Real Estate Brokerage Act protects buyers and imposes important safeguards, in addition to supporting agencies, training programs and numerous organizations from the industry. For the buyer, the freedom to choose whether they want to be served by a broker under a contract or by the seller’s broker is the most effective model for the moment. It is preferable to having buyers act unadvised.

3. Offer Disclosures and Other Conditions

Rules to protect the confidentiality of the information contained in promises to purchase are essential. Under all circumstances, the disclosure of an offer’s content will not help the buyer. One must be wary of a cure that is more harmful than the symptom.

Allowing the disclosure of offers and other conditions could raise issues in the relationship between buyers and sellers. In a system where sellers would be required to disclose to potential buyers the terms and conditions of previously received offers, it would also be necessary to provide such disclosure to those who have already submitted an offer for it to be fair. Under this moderating principle, everyone should be entitled to receive the same fair and equal treatment and have access to the same level of information. To do anything else would be a true denial of justice. Moreover, the duty to act in good faith in contractual matters, present in Quebec’s civil law, would expose the seller to lawsuits.

To be fair, one would be dragging the buyers into a complex iterative circle that would not serve the clients well. So, to protect against recourse, the seller would either give a deadline for the submission of offers or allow a reasonable and fair time for everyone to act on a new offer. We would have made the system more complicated, and buyers would still be competing with each other to drive up prices. In addition, promises to purchase contain confidential information that cannot be disclosed. If there is going to be a requirement to disclose offers, a solution would have to be found to address this important issue.

Question: Should this disclosure be mandatory or at the discretion of the vendor?
Answer: Mandatory disclosure would be tantamount to introducing a public auction system.

If disclosure is at the discretion of the seller, it can be expected that, in all markets, it would work in the seller’s favour and would drive up prices. The system would resemble an auction system, which would result in higher sale prices. An added difficulty in implementing this scenario is that prices do not all fluctuate in the same way depending on the category and the sector. This measure would have undesirable effects where the market fluctuates differently.

Question: Should prospective buyer have the right to refuse that their promise to purchase price be disclosed to other prospective buyers?
Answer: The buyer will always have an advantage in refusing to disclose their offer. We would be in the same situation as the existing market rules.

Whether the market is favourable or not, no buyer would have any interest in having the contents of their offer disclosed. This would give competing buyers an opportunity to outbid them. If the buyer’s disclosure is optional, the buyer will always choose to withhold it and the market dynamics would therefore be the same as today.

Question: What would be the impact of changing the rule?
Answer: Regardless of any scenario and the state of the market, a change in the disclosure rules, whether they are discretionary or not, would have the opposite effect of what was intended and would instead contribute to higher prices.

4. Pre-purchase Showings

The overheated market has put a strain on property showings , a crucial moment in the decision-making process, and one that is emotionally loaded. The first showings, however, are always short, 30 minutes, including travel time, whether or not there is a pandemic. It is during the second visit of a “retained” property that the price and the conditions included in a promise to purchase are assessed. What has been problematic in the case of the current pandemic is that buyers were making up their minds as soon as the first visit, under the emotional weight of the situation. Here’s how the market dealt with this challenge.

Managing Showings to Reduce the Impact of the Intrusion into the Seller’s Home:

The physical showing always requires careful preparation. During the lockdown, sellers had to watch strangers enter their homes when they had nowhere else to go. Moreover, everything had to be disinfected before and after the visits. Sellers came to request that the showings be consolidated in a period of time.

Price as a Strategy to Manage the Volume of Visits:

Overbidding may have given the impression that prices were too low. Yet it is difficult to imagine a listing broker suggesting a price lower than the value of a property. It would be against their client’s interest and their obligations. In reality, brokers may have recommended higher prices in order to limit the attractiveness of the property and thus reduce the burden on the sellers.

The Principle of Collaboration:

The principle of collaboration is one of the foundations of the real estate brokerage system. It allows buyers to visit a property and then make an offer. This protects against risks of buyers getting out of hand and taking advantage of the situation. At the height of the overheated market period (January-June 2021), the proportion of sales between collaborators grew by 3.3 per cent. This means that there was a smaller percentage of sales in which the broker was acting for both the buyer and the seller. This figure demonstrates that the sellers’ brokers properly mediated the showing and adequately presented the buyers’ offers.

The QPAREB has two recommendations to further support the principle of collaboration.

1. Include a disclaimer in the brokerage contract informing the seller that it is not in their best interest to begin marketing the property prior to listing it on the distribution services. The warning in the brokerage contract must also remind the seller that showings must be offered to everyone and that limiting this right is not in their best interest.

2. The use of a showing register by the seller’s broker with a grid that records the main characteristics of the received offers and ensures the tracking of any follow-ups. This will prevent interested households from being left without an answer. A comparative grid outlining the main characteristics (price, financing, conditions, etc.) should be attached. This will provide the information on which basis the seller has chosen one offer over another.

5. Public Auctions

The QPAREB intends to further explore whether such a system is advisable and if so, how it might be implemented. For us, a public auction system could facilitate efficient, secure and fair transactions that respect the rights and obligations of all parties.
They include an offer that they consider reflects the value and conditions of the property, taking into account its reality and the expectations (or perceived expectations) of the seller.

Public auctions are based on the obligation of the seller to accept the best offer or face severe consequences. The participants can therefore take note of the most recent offer and then submit a better one. This remains the case until the final bid is reached, which coincides with the end of the auction’s scheduled duration.

Public auctions eliminate discussions and negotiations between the prospective buyers and the sellers. The seller, besides being involved at the time of the auction of the property, will only be able to intervene once the last bid has been submitted, at the end of the process. The seller will then be required to accept this last offer. Whether it is the best bid in all respects or not, it is the bid that will bind the seller. It is in the seller’s interest to carefully evaluate the advantages and disadvantages of this type of process before deciding to use it.

Let’s keep in mind that many sellers choose to reject buyers who have submitted the best offer because of emotional factors such as preferring other buyers who are similar to themselves, disagreeing with what the buyer intends to do with the property, seeing the buyer as a speculator, suspecting that the buyer is planning to demolish or rebuild the property, etc.