What a fabulous buying
opportunity. Or is it? After years of sharp price increases, the costs of
Calgary houses are finally down nearly four per cent from where they
were a year ago.
While real estate
company statistics show prices and sales
continuing to climb across the country, a number of
markets have turned, offering Canadians a useful experiment in the
behavioural economics of the housing market.
About a year and a
half ago, I wrote a piece saying that house
prices could fall like oil. The point was not to predict a
property market crash, it was merely to remind us that the smartest
people in the oil industry failed to predict the current tumble in energy
prices that now seems so obvious.
Unsatisfied demand
At the time, the
response from many was that a property market crash could not happen, simply
because there were so many people waiting to get into the market. As soon as
prices declined, those hungry house hunters would respond by snapping up
anything that was offered.
According to long time
investment adviser and real estate guru Hilliard MacBeth, the bargain hunting
in Alberta has already started.
"I've heard of
lots of people who say, 'The prices are down. I'm going to jump in,'"
said MacBeth, Edmonton-based author of When the Bubble Bursts.
In fact, some of the
people he advises have already identified a buying opportunity and jumped into
the market, at least on behalf of their kids, who they are helping out in the
role of bank of mom and dad.
"I would have
counselled them against it," said MacBeth by phone as he put on
his ski boots in the Lake Louise parking lot. "I would have said,
'Wait,' because we're early days yet."
Lagging indicator
Housing is considered
to be what's called a "lagging indicator," meaning that real
estate markets only respond long after the economy has started to go
sour.
And according to
Calgary-based behavioural economist Robert Oxoby, that's at least partly due
to something behavioural economists refer to as "loss
aversion" by current home owners.
Behavioural economists
love to point out when conventional market rules are overturned
by psychology. Especially when human behaviour makes us act contrary to our
own interests.
Normally, economic
theory tells us that when things get cheaper, we buy more.
When things become more expensive, we buy less. In the property market,
that often turns upside down.
"There's a lot of
herd behaviour here. We behave like cattle," said Oxoby, a
professor at the University of Calgary.
"People see the
prices going up, and they go, 'Oh, shit, I better buy a house now before it
gets worse.'"
Fraser Valley rising
In a place like B.C.'s
Fraser Valley, where prices have risen 27 per cent this year, following the
herd doesn't look so stupid.
"Speculative
fervour thrives on expectations of rapidly rising prices — rising rapidly
enough that buyers find it rational to make bets they could not normally
afford," said a writer for The Economist discussing not houses but the price of baseball cards.
It is on the way
down when loss aversion kicks in, this time hurting people who want or need to
get out of the market.
"When the value
of that house is high, they tend to view that as a gain," said Oxoby.
Loss aversion makes sellers refuse
to sell, preferring instead to wait until house prices bounce back
again.
The problem arises
when that bounce-back fails to happen. And the people it hurts most are those
who bought just before the downturn began, when the market was at a peak.
"So, what happens
is as prices start to fall even more, people get
trapped with those big assets that they have a lot of debt
on but aren't worth as much anymore," said Oxoby.
MacBeth calls the
price the seller expects to obtain the "anchor price" and says
the refusal to accept anything lower seizes up the market. That's
because buyers are expecting a bargain.
He says that
the conflict between high selling prices and low offers,
demonstrated in the current slowdown in sales in places like Calgary, can
take a long time to resolve itself, often only does so after banks begin to
call in loans, forcing foreclosure sales at the true market price. Thus the
lag.
According to
colleagues in Calgary, the market for houses priced at less than
$500,000 is stronger than more expensive offerings, but as thelatest figures show, the entire market is slow.
Timing the market
For
prospective buyers, suddenly, the challenge is exactly opposite from what
it was a few years ago. Instead of being forced to buy before prices become
unattainable, they wait, wondering when the market will hit
bottom, fearful that further declines will wipe out their
down payment and leave them owing more than they own.
There is only so much
people in other parts of Canada can learn from housing markets
devastated by falling energy prices.
"One of the
things that was supporting Alberta home prices was the fact that our
incomes were 40 to 50 per cent higher than the rest of Canada, and that's
changing very rapidly," said MacBeth.
But property owners
and prospective buyers elsewhere would be wise to watch and see if,
indeed, the plunge is nipped in the bud by bargain hunters or whether prices
continue to fall for a while yet
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