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Nathan Dautovich

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How Emotions Drive the Real Estate Market

Posted: 10/25/2013 12:33 pm

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.

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    This newly-built home just northwest of downtown Calgary not only looks cool and has excellent views of the city, it features some pretty slick amenities, such as built-in kitchen appliances, a 1,500-bottle wine cellar and five bedrooms across 5,300 square feet of living space.

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Calgary - $4 million

  • Montreal - $3.25 million

    This house in Montreal's old-money Westmount area was built in 1857 and, with its awesome wrap-around porch, may be the coolest heritage residential building for sale in Canada right now. It's actually three units -- a main house, a townhouse in the back and what's referred to as the "well house." Three bedrooms and two baths in the main house.

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

  • Montreal - $3.25 million

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    Can you say house with a view? This four-bedroom property features not only one of the best views out of anyone's living room window in the country, it also has an outdoor pool, sunk slightly below house level, with views all its own. Four bedrooms and an elevator in this house the realtor describes as an "amazing entertainment home."

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • West Vancouver - $7 million

  • Vancouver - $8 million

    Located in Vancouver's (now) prestigious neighbourhood of Kerrisdale, this house is described by the realtor as "an expression of West Coast Modernism." We're not sure what that means, but this house's situation next to an elegant outdoor pool is certainly eye-catching. Four bedrooms on 5,200 square feet of living space.

  • Vancouver - $8 million

  • Vancouver - $8 million

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  • Cape St. Mary's, Nova Scotia - $3 million

    The coolest thing about this house is the location -- look at where it's sitting! Not for the faint of heart, this eight-year-old house sits perched 90 feet above the Atlantic Ocean on the Nova Scotia coast. Five bedrooms in this property that sits on 16 acres of land.

 
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