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Tag Archives: market conditions

How Emotions Drive the Real Estate Market

Nathan Dautovich – Huffington Post

For years now we’ve seen interviews and quotes from industry analysts about how the Canadian housing market is overvalued by 10-20%, at times even more. There have been industry warnings about an impending crash, and Canadian home owners have been warned to expect a significant correction in housing prices.

Yet as of right now, there has been no significant slowdown. If anything, the housing market has improved, with prices consistently going up and properties selling at a good rate. Why is this? Why have all these experts been wrong?

Comment: Because they were wrong. They used incorrect stats, they twisted data to make a point that didn’t exist, they predicted things that had no chance of happening. They compared prices to incomes, a moot ratio. They should have compared monthly income to monthly costs – a ratio that is lower than it was 30 years ago. They predicted mortgage rate rises that were simply never going to happen. Or, they bandied about completely meaningless terms like “overvalued” without ever stopping to define it. Many just shouted out worst-case scenarios in a vain attempt to get their names in the news.

A big part of this is that these industry prognosticators do not take into account the emotions of Canadian homeowners. It isn’t all about dollars and cents and what can give the best return on investment. Instead, emotions play a large role in the home-selling process, and they may ultimately prevent or at least delay any slowdown in Canadian real estate.

Comment: Sort of. Incomes and mortgage rates and neighbourhoods and house prices have a lot to do with it as well. That is what sets the stage for what houses are available options for people. Once they have that pool of homes to look at, emotion plays a large part in which one they buy. But emotion has nothing to do with what mortgage rate you get, or what your income is.

I have the privilege of sitting down and talking with hundreds of homeowners every year. The conversation always touches on what they originally paid for their house, the market conditions at the time, and their experiences living in their home. Selling a house is an incredibly emotional process, and almost every home owner believes their home is special or unique in some way. This adds to the hesitation in even considering a lower price.

Comment: Why would anyone consider a lower price when Toronto real estate prices are rising 4-8% annually?

After the initial conversation comes a full real estate appraisal, comparing the house to other properties that have sold. Here, the emotional bias of home sellers is even more apparent, as they have no problems finding issues in other houses that have sold, while they can only see the positive features of their own home.

Comment: Of course, everyone thinks their house is the best!

When it comes to pricing, homeowners consistently refuse to take a loss on their house when they sell, and they need to at least break even on their investment. Even if the market is telling them it will be impossible to recoup their original investment, they often either decide to price it too high, or to just not sell — after all, they’ve just spent an hour talking about how great their house is!

Comment: Of course not, why would anyone take a loss? Unless they bought last week, their house is simply worth more. Heck, I had clients in the spring sell the house they bought in the fall. I think they owned it for all of 8 months. They made $93,830 more than they paid. They were just hoping to break even!

The industry analysts are missing the fact that there are a number of homeowners who would list right now, but are choosing not to take a loss on their home.

Comment: What are you talking about? No one is taking a loss on their home these days, none. Everyone is cashing in, making money. That is part of why prices keep rising, month after month after month after month after month. For 17 years now, prices have risen. No one is taking a loss, no one.

There are a number of factors that prevent homeowners from seeing their home as a pure investment like the industry analysts. I would say that the home seller’s self-perception is the most prominent factor in Toronto. Every day we hear stories about people making huge profits from Toronto real estate; everyone has a friend or two that has sold a house in a “hot neighbourhood” for a windfall profit. People don’t want to tell their successful friends about how they lost money when they sold their home. It becomes more about their social status and ego than about the economic indicators. Any investor will tell you that this is a bad way to look at an investment, and that the purchase price is irrelevant, but that is not how most people see it.

Comment: No one is talking about losing money on their home, because they aren’t! A house worth $400,000 today is like going to be worth $420-430,000 next year. Maybe more, depending on the neighbourhood. Sure, some ugly 1970s townhouses in North York are not really rising, but they are also not falling. I have done the numbers, there is not a single district in Toronto where the average price has fallen over the past 5, 10 or 20 years. Sure, there are always the odd exceptions to the rule, but claiming that seahorses and their birthing males are proof that all animals have pregnant males is just as ridiculous.

There is no doubt some truth behind the doom and gloom real estate predictions, and after over a decade of record growth in the Toronto market, a correction is in order. It just may be slower to come, and may not be as singularly impactful as industry analysts predict.

Comment: No, there is no truth. That has been proving month after month, year after year. I remember the first prediction that the condo market would crash, back in 2003. Was just as false then as now. How about all the predictions over the past 5 years that prices would fall 10-20% or that mortgage rates would rise to 8%? All wrong. This is the same claptrap as so many others: “Since it hasn’t happened yet, it will just happen later. Maybe next month… or next year. Sometime, trust me, at some point in the future I will be right.” NO. You won’t be right. Prices will never fall, not any significant amount, not for any significant amount of time. Who knows, by some fluke prices might not rise one month, but then they will shoot up again the next one. You will NEVER EVER see a sustained price drop of 10-20% in the Toronto real estate market. Never. Even if a meteor destroyed downtown, it would just make Leslieville all that more attractive.

Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.