How Emotions Drive the Real Estate Market

For years now we've seen interviews and quotes from industry analysts about how the Canadian housing market is overvalued by 10-20 per cent, 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?

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.

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.

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.

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!

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.

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.

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.