04/10/2017 11:54 EDT | Updated 04/10/2017 11:54 EDT

Flashy Headlines Driving Toronto Real Estate Market

Mike Cassese / Reuters
A sold sign is displayed in front of a home in Toronto December 15, 2009. A red-hot housing market fueled by cheap money has helped Canada climb out of recession, but fears are growing that it could be a bubble much like the one that brought the United States to its knees. Picture taken December 15, 2009. To match ANALYSIS CANADA-HOUSING/ REUTERS/Mike Cassese (CANADA - Tags: BUSINESS POLITICS)

We've all seen news headlines over the last few years describing properties that sell for "$400,000 above asking!" These headlines make it seem like houses are selling for much more money than they are actually worth. This is rarely the case, because in an open market like real estate, houses tend to sell for their current market value. A different headline that is just as true could read "House sold for market value, was listed for $400,000 less."

This headline pays more attention to the fact that in a bidding war the asking price is just an arbitrary made up number, and the selling price is the most important part of a sale. This would be a more accurate depiction of what actually happened, and it might help if homeowners remember this when buying and selling in Toronto.

This situation arises when a home seller opts to sell using a bidding war strategy, where they purposely underprice their house in hopes of garnering lots of interest and getting multiple offers on a pre-determined day. A few years ago, houses would often sell for just a few thousand dollars above the asking price, but now it almost seems like it's a competition to see who can get the most "above asking".

Some recent sales around Toronto have even sold for more than $1 Million above the asking price, making it seem like a home seller had the value of their home double overnight. The reality is that in most bidding wars, the asking price is a meaningless number, and savvy buyers all know in advance what the house will likely sell for. A house could be listed for $1 or for $1 Million dollars, but in the end the selling price will likely be the same.

It's understandable why news outlets choose to describe the transactions this way. It seems very exciting, and drives a lot of traffic as people search for what they believe could be a record price in their neighbourhood. However, it also creates a false sense that properties are selling for much more than they are actually worth.

This exaggeration is no doubt fuelling the sense that buyers need to overpay for homes, and is contributing to the huge increases in real estate prices. Some buyers will interpret "$400,000 above asking" to mean "$400,000 above market value" and feel they need to increase their own offers accordingly.

It is important for Canadians to focus more on selling prices than anything else when making decisions regarding buying and selling properties, and to try not to pay attention to flashy headlines or advertisements about how much "above asking" houses are selling for. At the end of the day, that number could either be inflated or irrelevant.

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