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Click, Whirr – Betting the Shortcut July 15, 2008

Posted by DustinRJay in Calgary real estate, market behaviour.
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The failure in the US housing market was not a black swan as some have described it, but an error in understanding and managing collective risks.

Some of the psychological phenomena that may have contributed to the housing boom and bust are explored in a book called “Influence – The Psychology of Persuasion.” Some of these are:

1.  Social Proof – Truths are Us

  • Banks rely on other banks to determine risk management practices and safe lending procedures
  • Real estate investment organizations like Alberta REIN have a bandwagon effect or crowd psychology (see photos here)

2.  Authority – Directed Deference

  • Appeal to authority of a “REALTOR®” (don’t forget the caps lock!)

3.  Scarcity – The Rule of the Few

  • Appeal to buy due to lack of supply (low housing inventory in Calgary 2006 to mid 2007)

4.  Commitment and Consistency – Hobgoblins of the Mind

  • The real estate market has only gone upwards for the past 10 years and therefore is perceived as having no risk

And on that note, I’ll leave you with a YouTube video of last weeks bank run on Indymac as a demonstration of crowd psychology.  Enjoy!

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Comments»

1. Michael Oliver - July 15, 2008

Yes so true I have also read this book and it is filled with good info. People love to be pessimistic until they see everyone else doing something then they jump on only to be the last ones. I saw that happen with the real estate market here in Tucson Arizona. The same people that told me “Prices are WAY to high” in January of 2003 came running into buy all the homes they could in June of 2006 when they saw everyone they knew making money hand over fist. Now the market is down 30%+ from those highs.

2. BradBender - July 15, 2008

There’s no doubt in my mind that psychology played a HUGE role in the Real Estate boom (particularly in Calgary). I’ve heard so many people claim that “Real Estate is zero risk” and “get in as soon as you can”. It drove me insane while friends tried convincing me a 40-year mortgage and $320,000 for an 800 sq.ft apartment was a good idea. I’d just as soon move away than pay that.

The recent cool-down in Calgary has led to some interesting conversations.
Friend: “So, have you bought a house yet? It’s such a great time to buy.”
Me: “Are you kidding!? It’s the worst time to buy!”
Friend: “What do you mean? There’s tonnes of houses to choose from.”
Me: “Prices haven’t come down, so how’s it a good deal?”
Friend: “That’s interesting. You’re the first person I’ve spoken to who says that.”

Clearly most Calgarians are still drunk on their own punch. In the summer of 2006 all the talk around the office was people getting new homes, now no one is talking real-estate. I expect a slow steady decline in prices. Eventually the global slow-down will penetrate the bubble that Calgary is in.

3. Bill - July 16, 2008

Prices are down a bit- not enough to make a difference yet- but the trend has reversed.

There are a couple of million dollar in fills on my Glengarry street-its ridiculous.

4. Marty - July 16, 2008

I lived through a hugely engineered RE boom in the late 80s in England. I remember my boss telling me to get on the property ladder at all costs, pay whatever, sell a kidney just do it before it’s too late. My Wife and I continued to rent a fully furnished unit till we came to Canada in 1993. We watched as the market peaked, softened then plunged. I watched my own brother’s apartment fall 50%.

In 2000 I was working for the darling of the stock market and all of my colleagues had six figure stock options and were ‘day traders’ – ‘you can’t lose – it’s the ‘NEW’ economy’. I admit to having feelings of envy and being left out of the party. Then the inevitable happened and I watched the stock (and my own retirement fund) go from $125 to 67cents! Unfortunately I bought the line about ‘dollar cost averaging’ and went down with the ship.

Now in Calgary we have the infallible 50% increase per year forever market. I watched my friends buying risk free investment properties and ribbing me for not getting in on the new party. Those same people are pretty scared right now.
We are lucky that we bought in 1997 but I think anyone who bought in the last 2 years is going to take a very unpleasant bath.

I think it was Warren Buffet that said “be fearfull when everyone around you is greedy and be greedy when everyone is fearfull” – I also quote a famous Jedi who said “I’ve got a bad feeling about this”

I enjoy reading the ‘shills’ who see silver linings everywhere:
“Real Estate only goes up in value – they stopped making more land!”
“This time it’s based on sound fundamentals”
“There’s never been a better time to invest”

as the inventory grows:
“Now there’s more choice for buyers”
“It’s returned to a balanced market”

as prices soften:
“RE prices take a breather before continuing to skyrocket later this year’
“There’s no risk of a meltdown here because we have no sub-prime problem”
“buy now before prices start going up again in the fall”

as it deepens (Denial):
“We are predicting a soft landing for the RE market followed by a modest uptick”
“House prices up 100% – WOW!!!*” ……*over the last 100 years. MT, Calgary Herald
“Sales down but prices stable using the magic new CREB formula”

As prices fall (Acceptance):
“Inner city prices climb…”
“Affordability increases”
“House prices skyrocket..”MT, Calgary Herald

Market crashes (Panic):
“House prices Plunge…get out get out!!!” – MT, Calgary Herald
“Real Estate MELTDOWN….argh!!!” – MT, Calgary Herald
“How can this happen? – I was planning to buy Brazil” – MT, Calgary Herald

I shall watch with interest as events unfold…..
M

5. section31 - July 21, 2008

lol funny but sad at the same time.
For me it just sucks that I have to wait around 2 years before I buy a house. i can afford one now and I really want one but I know its a horrible investment right now. Sucks!

6. sandrar - September 10, 2009

Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.


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