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Scenes from the wildest real estate frenzy Canada has ever seen

ROB magazine

It's a mad, mad, mad, mad market

Something crazy happened in the Toronto real estate market in the first few months of 2017. Sales shot up, prices spiked, and buyers who hesitated a single day could end up paying an extra 100 grand. And then, everything changed. We meet some of the characters who lived through what just might have been the wildest real estate frenzy Canada has ever seen

Photographs by George Qua-Enoo

The desperate buyers: Natanya and Stephen Mandel, who moved to Toronto from the world’s second-most-expensive real estate market, Sydney.

One Monday evening in late March, Stephen Mandel found himself watching his kids' swimming class and trying to buy a house at the same time. For an hour, he ran between the pool and the change rooms with his phone glued to his ear, getting updates from his real estate agent and conferring with his wife, Natanya. The kids knew the drill—this was their fourth swim class interrupted by their parents' attempts to secure a home. "We had a signal—two thumbs up or down," says Mandel, "and every time my daughter finished a lap, she'd look up at me."

The couple had moved to Toronto from Sydney in February, staying with Stephen's family while they searched for a house. Initially, says Natanya, "the prices didn't seem that high"—an astonishing statement to anyone acquainted with Toronto real estate circa early 2017, until you realize that Sydney is the second-most-expensive housing market on the planet (after Hong Kong).

But prices were actually much higher than the Mandels thought: They'd assumed the list prices would be within 10% of the eventual sale prices—the margin realtors in Sydney must target or risk penalties. "I was shocked how much more houses were selling for," says Natanya. In fact, much of the real estate process in Canada struck them as bizarre. When the Mandels sold their house in Sydney, interested buyers gathered in their backyard for an auction; by the end of it, people were raising their bids by $500 or less. "Here, you don't know—you could be paying $10,000 or more over the next closest offer," says Natanya. "The lack of transparency is appalling."

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The couple soon realized they had moved to a city in the midst of a home-buying hysteria. Houses within their $1.5-million budget seemed to shrink and grow shabbier with each passing day. They lost four bidding wars and, unable to find a house for rent— "leasing agents wouldn't even return my calls," Natanya says—they were starting to feel desperate.

So when they saw a three-bedroom detached in midtown Toronto listed at just over $1 million, they jumped on it. They were among eight bidders to put in an offer the following evening. "Most times, agents would only invite back the top two offers, so we went with almost our best right away," says Stephen. This time, they got a shot at a second bid and won—at 46% over the asking price. The kids, fresh out of the pool, were excited, but their parents' main emotion was a deep sense of relief. "We just wanted to be done," says Natanya.

The Mandels sure picked a lousy time to buy a home in Canada's biggest city. Something happened at the start of this year that might be viewed from the distance of time as the Great Real Estate Frenzy of 2017. After a steady rise in prices through more than a decade, and with an increasingly steep trajectory beginning in 2015, Toronto's residential housing market lost its mind this past January and remained mad, loony, absolutely bonkers until mid-April. Between January and March, house prices averaged 30% spikes over the previous year, and sales volumes jumped as much as 18%. "Those were the busiest months I've ever seen," says realtor David Fleming, who's been in the business since 2004. "People were scared that a delay in buying of a day or two could cost them $100,000."

Just as suddenly as the run-up started, it reversed course. In May, sales dropped by 60% in parts of the Greater Toronto Area (GTA) that had experienced the most frenzied activity. Through the summer, an uneasy quiet settled over the market. Bidding wars subsided. Homes sold near or (gasp!) below asking price. By early September, most of the price gains from the first four months of 2017 had been erased, especially for the mid-range detached houses that had attracted the fiercest interest.

What spiked the fever in January? And what cured it in April? Opinions vary, but most experts agree on one thing: This fall—a season when housing sales typically perk up—will determine whether we've witnessed the beginning of
the long-predicted real estate crash or merely a brief respite in a prolonged boom. Those on the front lines who profited or suffered from the craziest real estate frenzy Canada has ever seen are left with indelible memories of a time when desperate buyers paid hundreds of thousands of dollars over asking for suburban bungalows, clueless new realtors swarmed into the market, and speculators gorged on cheap debt only to find themselves unable to cover their mortgages. Here are their stories.

The flippers-turned-renovators: Valery Macri and her husband, Paul Pascolo, who abandoned real estate speculation when prices went haywire.

Chapter 1: The build-up

Walking into the house in west Toronto's posh High Park neighbourhood is like the shock-and-awe moment on a reno show, when the homeowners gaze around in horror and try to reassure themselves they haven't made a terrible mistake. The place is gutted to bricks and studs. Valery Macri offers to show the basement, but the stairs look too dodgy for a safe descent. The big reveal—seven months and hundreds of thousands of dollars later—is sure to be just as startling, once Macri and her husband, Paul Pascolo, have lanced the boil of an enclosed porch out front, added new washrooms, and outfitted the space in wood, stone and stainless steel.

Macri and Pascolo—a.k.a. Lionfish Developments—began buying and renovating Toronto homes in 2000. "Back then, you could get a big, beautiful house like this for $400,000," says Macri wistfully as she sits, her legs crossed demurely, on a rickety folding chair in the garage, the only place not under construction. Originally, they converted homes they bought into rental properties. But around 2010, they began flipping—buying "raw product," renovating it to dazzling fabulosity, then reselling it at a premium—though the term's connotation of a quick, lipstick-on-a-pig reno causes Pascolo (the largely silent partner in interviews) to purse his lips. "We prefer 'speculating,'" he whispers.

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The couple developed a formula: find a beaten-down dwelling for under $1 million, in a neighbourhood close to a wealthy area or a highly rated school district undergoing a generational or gentrifying shift; carefully scope out the surrounding properties; avoid corner lots (they're "very polarizing," says Macri). Lionfish thrived, with its work splashed across glossy house-porn magazines and websites.

But things began to change in 2015. "We started seeing less raw inventory and a lot more people doing what we do," says Macri. "More people were coming out on offer night and going a lot higher than we felt comfortable paying." The presence of foreign buyers became obvious: agents giving video walk-throughs via iPad, and tales of realtor-organized buyer "caravans" visiting a dozen properties in a weekend.

When weighing a flip, the couple factored in a potential 10% change in market values, and as prices soared, recouping their investment after reno costs became an ever-bigger gamble. In late 2015, they put an offer on a dilapidated house and found themselves up against 12 rivals. "That was the moment we realized we should adapt the business model," says Macri. They decided to take a pause from buying to focus instead on pure renovation projects. "There's a lot of capital needed in this business," she says. "We couldn't tolerate the risk."

The market's sudden surge worried others too. By 2016, John Pasalis, president of Toronto brokerage Realosophy, began to notice a disturbing pattern: Roughly half the people coming into his office wanted to buy properties purely as investments, borrowing against their already highly mortgaged homes. "When we showed them that rent wouldn't pay their carrying costs, they'd say, 'Who cares? If the value goes up 15% or 25% a year, I'll make $100,000.'"

To "quantify the irrationality in the market," Pasalis tracked houses listed for lease on MLS within 12 months of purchase. This subset of investors accounted for 10% of sales in the GTA and as much as 39% in some suburbs. Factoring in condos and properties rented beyond MLS, Pasalis pegged speculators' overall share of the market at up to 30%. Other research showed a similar pattern. According to provincial statistics, twice as many people owned more than one residential property last year than was the case in 2010.

The most concerning finding, however, was that 95% of all investment properties bought in 2016 were losing money—an average of $1,121 per month. Pasalis heard people talking about covering shortfalls in mortgage payments through cash advances on credit cards. "In many cases," he says, "their investment properties are being financed entirely by debt."

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The sought-after stager: Carmen Wageman, arguably Toronto’s top outfitter of high-end properties.

Chapter 2: The real estate industrial complex

Carmen Wageman eyes the dramatic white pendant light suspended from the 18-foot ceiling with disapproval. "We recommended this come out," she says. "It's…"—she drops to a stage whisper—" Ikea. It's too recognizable. It cheapens the place." Considering that the owner—who recently bought this two-level condo overlooking Lake Ontario as an investment—plans to rent it for more than $8,000 a month, it must look deluxe all the way. So Wageman arrived here this morning with five staffers in two trucks (each sporting her smiling blonde head on the side) loaded with furniture to stage the apartment for viewings. The hope is to spark the kind of bidding war increasingly common on rental properties. This being early August, the founder of Stage Right, perhaps the city's top outfitter of high-end properties, can give it her personal attention. During the busy spring and fall seasons, she reserves her time for walk-throughs with clients or potential clients, leaving the execution to her staff.

Spending $5,000 to deck out a rental is unusual, Wageman concedes, but after the past year, little surprises her. When she launched her business early in the millennium—back when staging was still called "fluffing"—she might have changed out a sofa, dressed up the walls, slapped on some fresh paint. The first time she tried to rent furniture for a month-long staging, she was met with raised eyebrows. "I felt like a snake-oil salesman telling people to rent furniture," she says. "They thought they'd be duping the buyers. But HGTV validated the idea that you should do whatever you possibly can to protect your investment." Now, she will "edit" much of the furniture and accessories, sometimes fitting out an entire house for up to $7,000. She estimates her services would "conservatively" add $50,000 to a property's market value.

Wageman greeted surging real estate prices with concern. "I worried people would ignore the value of staging, figuring they'd get 10 to 20 people in a bidding war anyway." With her business growing by 20% a year, she invested in upscale furniture and art so she could go after higher-end jobs. She now has enough furniture to stage 50 homes. She stores it all in a 16,000-square-foot warehouse and a 5,000-square-foot showroom for homebuyers who want to keep her decor.

Staging has become so common that many large brokerages have stagers on staff. "You recognize certain agents' listings because they have the same sofas," says Pasalis. The boom in real estate activity has been a boon for other service providers, from movers to publishers of "advertorial" real estate magazines to photographers who use drones to shoot high-end properties. In fact, real estate is now the top driver of Canada's economic growth and employment.

The influx is particularly pronounced in the realtor ranks. There are close to 50,000 licensed agents operating in Toronto, up from 34,000 five years ago—a surge nearly 10 times the rate of overall job growth. The barriers to entry in Ontario are low: a course that takes up to a year, at a cost of about $3,000. The emergence of "virtual" brokerages, some of which have no physical locations and take a much smaller cut of agents' sales than traditional brokers, has helped the newcomers. Yet, the bulk of the transactions are still handled by less than 10% of agents. "You often see people get in for a year or two, then they're out," says one seasoned realtor.

The quality of the service is, of course, spotty. The gap between listing and selling prices isn't always due to attempts to generate bidding wars—many agents simply don't know what a home is worth, says Fleming. "There are complete and utter delusions among young agents," he laments. "They dress up, they have a Mercedes, a nice haircut, but many just can't do math." Marketing? Some just put up a sign, list on MLS and wait for offers. Sage advice? Pasalis once overheard an agent tell her clients that it didn't matter what they paid for a condo, since the market would rise to meet their price by the time they got the keys.

Yet in an unprecedented market, most buyers and sellers yearn for guidance—so much so that some no-frills brokerages, which offered lower commissions in exchange for leaving tasks such as property photography or staging to the clients have found they had to bring those frills back. When Wageman explains what staging a home entails, "the clients look like their heads will explode. So we tell them, 'Don't worry about it, we'll connect you to the right people.'"

The showman: Daryl King, hotshot realtor and star of the cable show Top Million Dollar Agent.

Chapter 3: The frenzy

The Real Estate Wealth Expo may well be remembered as the peak of irrational exuberance in Toronto real estate. Held in mid-March, the event drew 15,000 people to cheer on motivational speaker Tony Robbins, hear pundits hype "unmiss-able" investment opportunities, and bop along to rapper Pitbull performing, fittingly, "Don't Stop the Party."

"Fear will kill you. Fear will drown you," Daryl King, the self-styled "king of real estate," told the rapt audience gathered for a panel discussion about the market. "'Oh, prices are too high…The market's gonna crash,'" he mocked the skeptics. "Yes, it may adjust at one time, but if you never get in the market, you'll never have a chance!" Four months later, posters from the Expo still dot the walls of King's office in York, the region north of Toronto that saw the biggest price run-up and most frenetic buying by investors this spring. It's also where King reigns as the No. 1 realtor. His checked jacket and paisley shirt (with matching pocket square) are accessorized with a ring and a lapel pin, both sporting his logo—his initials topped by a crown—plus a gold chain and a careful comb-over. ("I thought you'd want to take pictures—I dressed up.")

King's aggressively ingratiating demeanour and penchant for uninvited endearments make him what once would have been called a natural-born salesman. "Like Wayne Gretzky was to hockey, what Michael Schumacher was to Formula One, or Michael Jordan to basketball, I was to real estate," he says of his rise in the business. He shows off a flyer for a property with an eight-car garage and a fountain out front. "Honey, if you saw it, you'd want to buy it," he says, noting that the house will be featured on an upcoming episode of his TV show, Top Million Dollar Agent. Airing on Rogers cable, it stars King and several other realtors leading rapturous buyers around splashy spreads—a showcase of ostentatious consumption for a house-obsessed era.

There are many theories about what caused the already hot market to boil over as 2017 dawned, including the likelihood of mortgage tightening and hints of rising rates. Ultimately, the year opened with scant inventory and through-the-roof demand, perfect conditions for hyper-appreciation. (A sales-to-new-listings ratio of 40% to 60% reflects a balanced market, and readings above and below represent buyers' and sellers' markets, respectively. In January, the ratio topped 94%.)

King believes the sudden spike was largely driven by the knock-on effect of Vancouver's tax on foreign investors, which sent demand eastward. Asian buyers are a significant part of his clientele (though foreign buyers account for less than 10% of home sales in the GTA). "They want to get money out of their country, take it to Canada, where they think it's safe," he says. "And those people would pay more than a local person." King sold one bungalow in Mississauga for $527,000 over asking with 16 offers, including three of his own bidders, one of whom won. (This practice of a single agent representing both buyer and seller, called double-ending, may soon be banned in Ontario.) "Was that too much?" he asks. "No. The buyers got a great deal still, and the sellers got a great deal."

Renovators Macri and Pascolo, who continued to attend open houses with clients, also recall a startling change. "In the middle of winter, it just started at 140 miles an hour," says Macri. "I saw a frightening frenzy, as if this would be the last opportunity for people to buy a home." They visited one property that needed a full reno. The year before, they'd flipped an almost identical semi in the same neighbourhood for $1.7 million. This one went for more than $3 million with 22 bidders. "We were gobsmacked," says Macri. "Paul and I looked at each other and said, 'This cannot sustain itself.' What will happen when these have to go to closing date and the bank doesn't appraise them as high?"

Come spring, some sellers delayed listing their homes—why not wait, when in a month they'd be worth 15% more? Pasalis remembers showing a couple a condo in a downtown low-rise in March. With more than 10 offers, the unit sold above $900,000—more than 20% higher than an identical condo one floor up had fetched two months earlier. "We told our clients, you don't want to win at those prices."

Even King knew it couldn't last. "What we had for those months was not a real market," he says. But that didn't stop him from urging buyers to dive in. "It doesn't matter when you buy—you can buy at the very peak," he argues. "If you bought then, you say, 'I overpaid.' No, you didn't overpay! Because in two years, three years, five years, 10 years, the thing will probably double. You can never lose in real estate."

He offers just one caveat: "The only time you can lose is if you buy short-term, because market conditions change."

And in April, they did change. On a dime.

The elite agent: Cailey Heaps Estrin, who greeted the return to sanity with relief—even though her target market was slammed by the slowdown.

Chapter 4: The big chill

Cailey Heaps Estrin remembers the exact day the market turned, when the offer deadline on a house she represented passed with no offers coming in. "That house, two weeks before, would have had five offers," she says, seated in a small meeting room in her midtown office. "The sellers sat right here and said, 'We should have listed a week ago.'"

The sudden slowdown in late April and May—traditionally the busiest months in real estate—caught many sellers by surprise. The Ontario government's April 20 announcement of market-calming measures, including a Vancouver-style foreign buyers' tax, coincided with a 49% surge in new GTA listings in May compared to a year earlier, as more people decided to cash in on their insanely valued homes. With buyers retreating, sales in Toronto plummeted by more than 50% between April and the end of June, according to Capital Economics. In York Region, sales sank by 60%, and the average price dropped $200,000 from the March highs.

To Heaps Estrin, a realtor who focuses on some of the city's top family neighbourhoods, the slowdown came almost as a relief, though it disproportionately hit detached houses in the $1.5-million-to-$2.5-million range—her sweet spot. She'd found it hard representing buyers earlier in the year, knowing they might not recoup their money if they had to move quickly, while sellers fretted about whether they should wait to list. "I'd price a house and wouldn't know what it would be [worth] next week, it was changing that quickly," she says. Heaps Estrin is one of Toronto's superagents. Her team of eight realtors—No. 1 in sales in the city and fifth nationwide for Royal LePage, Canada's biggest real estate company—works out of a house that looks like it was staged for a quick sale: tasteful but generic decor, abstract art that matches the furniture and wall paint, big TVs in every room. Heaps Estrin herself has the air of a multitasking mom in charge of a large household, dashing around in sandals, glasses pulled up on her head. She eschews the pushy approach— "You'll never see my face on a billboard"—in favour of more sophisticated methods such as social media (she's sold high-end properties via Facebook) and market analytics.

Heaps Estrin is acutely aware the public thinks agents have been raking in fat fees for little work and resents it. "I work 16-hour days for many parts of the year. I go weeks without spending more than 10 hours with my kids. And that's okay, I chose that," she says. "But there aren't many careers where you leave at 7 a.m. and come home at 1 a.m. And when the market goes down, no one feels sorry for us."

To her mind, the government's intervention was a catalyst for the slowdown but not the only reason. "Any rational person knows that 30% to 40% increases year over year are not sustainable," she says. While the market-calming measures no doubt played a role—similar changes in Vancouver in August 2016 caused sales to fall by 33% the following month—many also see more mundane factors at play. The Home Capital scandal sent shivers through the market. Both Easter and Passover landed in April, distracting people from their home hunts. There was an unusual number of rainy days. Inventory typically rises in the spring as sales activity heats up. And not everything plunged: Luxury properties remained steady, and condo sales continued to roar ahead. "The media would have people think the market is dead," says Heaps Estrin. "If you take out that early period and look year on year, it's still a good market; it's just not a frenzy anymore."

But every transaction has two sides; for those like Wageman who serve sellers, the real frenzy began in late April. As a flood of homeowners put their properties on the market, her business spiked by 40%. "We ran out of furniture again and again," she says. "We stripped the showroom and had to close the store." There were many days when stress left her in tears. "So many phone calls, so many balls in the air, and you're afraid to drop any because you risk losing a client."

Through late spring, tales of frantic buyers were replaced by stories of panicked sellers. Some who had listed low in the hopes of generating bidding wars that never materialized relisted higher and "hung on for grim death," says Fleming. Many others took their properties off the market. One couple who had planned to sell their large house within a few years as their kids moved out decided to cash in this spring and rent for a while. They knew that May was the peak of the spring cycle, so they listed their midtown Toronto home in the month's first week—just as open houses began popping up everywhere. It sat for about seven weeks. "The agent says we should relist in September," says the homeowner, who asked that her name not be used, "but everyone is trying to do that." Her husband is more blunt: "Almost all real estate agents have no understanding of this type of market. If you've been in the business for 10 years, you've never experienced anything but handling multiple offers."

People who bought before selling their own homes found themselves caught. With their new property's value suddenly down sharply, some couldn't get mortgages because the price they paid exceeded what the property was now worth. Meanwhile, thousands who bought at the peak ran to their agents asking to scrap the deal—meaning they'd lose their deposit and potentially get sued.

The past summer was one of the quietest in Toronto real estate history as both buyers and sellers waited to see which way the market would move. Boosters like King, of course, saw the price drop as a fabulous opportunity. "Right now is probably one of the best times to buy," he said in July. "This drop is not going to be long-lived. Come late fall, the market could very well start to explode again." He may be right, but with homes in his region selling well below asking price, and half-finished townhouse developments gaping their empty doorways at passersby, would you bet your money on it?

Chapter 5: What's next

"Are the prices really dropping a lot?"

Natanya Mandel sinks deeper into her easy chair, afraid to hear the answer. It's mid-July, and she and her family are in unpacking chaos. The kitchen is set up, but stacks of boxes and piles of gear line the hallways and clog the living room.

Reflecting on her home-buying experience, she says, "I'm uncomfortable knowing that we bought during a sudden spike, but we didn't feel we had any choice. I had expected more bang for my buck, but we knew we had found our house." And, she figures, at a time when list and sale prices were utterly disconnected, does paying nearly 50% over list really mean anything? Similar houses went for similar amounts, the couple didn't exceed the top of their budget, and they don't plan on moving in the near future.

As of early September, the signs and predictions for the market remain mixed. Real estate bears—some of whom have been calling for a crash for a decade—point to all-time-high debt-to-income ratios and mortgage payments that eat up about 60% of an average Ontarian's income, making consumers vulnerable to rising interest rates. Ottawa is planning to further tighten mortgage regulations, which could lead investors to pull out and send prices spiralling downward.

But will that mean a crash followed by an extended downturn, like real estate cycles of the past? What happened in the first four months of this year surely deserves the name of bubble, but the longer-term trend is harder to characterize that way. With steady immigration and migration, a strong economy, low unemployment and continuing low interest rates, the GTA can support a 5% to 7% annual increase in home prices, Pasalis and many other market watchers argue. And that happens to be roughly where prices stand year over year, if you take out the first four months of 2017.

Fact is, Toronto remains significantly cheaper than other big cities in politically and economically stable countries: Sydney, Melbourne, London, Vancouver. Natanya Mandel figures a house in Sydney equivalent to the one she just bought would cost as much as $3 million. For the fast-growing middle class in emerging economies, such cities are essentially real estate banks: a way to stow savings in something that, like the stock market, may be volatile but will rise over time—and, unlike a single company's shares, will never lose its entire value. Vancouver's experience is instructive: The recent market drop there proved temporary, and the benchmark price (representing a typical home) breached $1 million for the first time this summer.

There are longer-term forces at play as well. James McKellar, director of the Brookfield Centre in Real Estate and Infrastructure at York University's Schulich School of Business, feels the traditional real estate cycles may be over for the world's top cities. We haven't seen a real downturn since 1989, he notes, except a brief dip following the financial crisis that the market quickly shook off. "We're not in a cyclical shift but a structural shift," he argues, driven by jobs moving from suburbs to downtown cores, where young people prefer to live. This demand for urban housing, however, isn't being met by the current city-planning models, which favour double-car garages and preservation of old neighbourhoods. McKellar calls it "socialism for the rich": older people in established neighbourhoods who espouse social values but want to keep out new, denser development. "And the more they fight new development," he says, "the faster their house prices go up."

Short of economic or political turmoil, these trends are unlikely to change soon. "Land is a scarce commodity. We're all competing for the same resource," says McKellar. "So when people say to me, 'When should I buy a house?' I say, 'When do you need it?'"

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