As discussed in previous posts, any prudent buyer who comtemplates purchasing a property should place the appropriate conditions on the offer, to ensure the appropriate due diligence has been taken. Typical conditions would include getting the appropriate morgage or a satisfactory inspection report on the property. In a slow market, buyers may even put a condition on the offer requiring the sale of their own property before firming up the purchase. (Many other conditions are in the buyer's arsenal, such as termite inspections, getting insurance, etc.).
In the past couple of years however, the market in the Greater Toronto Area has been so overheated that buyers have chosen to bypass conditions altogether in the face of competition from multiple offers. The offer goes straight from being just an offer to a firm sale once accepted by the seller.
An interesting trend to look at is the relation between the number of conditional sales to the number of firm sales.
In a strong sellers' market, one would expect the number of firm sales to be much greater than the number of conditional sales - an indication that buyers are forgoing conditions in order to win in a multiple offer situation.
In a strong buyers' market, one would expect the number of firm sales to be much fewer than the number of conditional sales - an indication that more buyers are putting conditions on offers and fewer buyers are going through with the purchase, and walking away from conditional offers.
The charts below show the relationship between conditional sales and firm sales. The number of condition sales for each month are tallied from the first of the month to the last of the month, while the number of firm sales are tallied from the 7th of each month to the 7th of the next month.
Why the seventh?
The rationale is that conditions typically run for five days, and I hear that realtors in Toronto normally don't update the status of the sale from conditional to firm immediately, either because the office is too busy or because they want the extra couple of days of free advertising. On sites like realtor.ca, a property is no longer searchable if it is sold firm.
Since the rule is that brokerages must change the status within two days, two more days are added to the five days of a typical conditional period to get the firm sales number by querying from the 7th of the month to the 7th of the next month. This is not exact science since some conditions run for more than five days and some offices change the status earlier or later than two days, but it's better than counting from the first of the month as long as the same methodology is used for every month.
The first chart shows both the number of firm sales and the number of conditional sales. We can see from this chart that both lines track each other pretty well. However, the subtle thing to notice is the gap between the firm sales line and the conditional sales line.
The second chart shows the difference or gap between the firm sales and conditional sales numbers. We can see that there seems to be seasonality in the gap - that is, in the colder months the market seems to be more of a buyers' market (smaller gap; fewer unconditional offers) than the warmer months. We can also see that the gap is trending down for the past two years. Fewer and fewer buyers are willing to put unconditional offers.
What continues to be surprising is that the gap is still positive even for the past few months, even with all the negative psychology in the market. This indicates that there are still more firm sales than conditional sales (i.e. there are still buyers who are placing unconditional offers).
The gap for January 2009 widen to 1023 from 514 in December 2008 for the entire GTA. Though this would indicate that the market was somewhat more active in January than December, the gap was still very low compared to the past couple of years. For example, the gap in April 2007 was 4757, likely due to the prevalence of bidding wars at that time, where to win a property a buyer pretty much had to put in a unconditional offer and in many cases, over the asking price.
The market is very quickly becoming a buyers' market but not quite there yet. In a full-blown buyers' market, I would expect the gap to go negative (i.e. only a portion of conditional sales go firm as few to no buyers would be brave enough to place an unconditional offer on a property). Furthermore, I would expect more buyers to jump ship, walking away from one conditional offer to put in an offer on a newly listed, better priced property.