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MacLean’s magazine has published another lead article about the state of the Canadian real estate market. Unlike the previous lead articles in 2012 and 2013, this one does not predict an imminent crash. In my opinion, their mistake is more subtle.

The article makes for some good reading during the summer. It tells some scary stories about

  • people unhappy about an ugly new monster home in their neighbourhood (which may be breaking the law),
  • the destruction of buildings that used to be somebody’s home or historic site,
  • improper bidding processes during bidding wars and
  • a class war between the rich and the poor.

Add in some exclamations such as “crazy”, “eye-popping”, “ridiculous” and dash of conspiracy about “foreign money” (even if there are more juicy stories than hard evidence).

And, of course, it talks about buyers paying stupid prices.

So, what is the real mistake in this article? Before complaining loudly about the current situation, one should think about whether there would be more complaints under an alternative. For example,

  • my neighbours would probably prefer that I mow my ugly lawn more often
  • a neighbourhood’s “character” is a difficult thing to identify and, anyway, it is probably better to let it evolve slowly (so the complaint is really about speed not the change itself)
  • to many buyers, the only thing worse than paying too much is being outbid. In a couple of years, we will see how many of these homes are sold at a much lower price following the buyer’s bankruptcy.
  • and, as the article slyly hints, if buyers were not paying stupid prices then sellers would be complaining (as they probably will when prices stop increasing).

(Complaining about people not following the bidding rules, when the rules were more of a suggestion, might be a very Canadian complaint. The more serious type of complaint is when a real estate agent changes the rules to benefit themselves without telling others including the people they are supposed to be working on behalf of. That situation is a conflict of interest. In most places, the process for complaining is clear enough and people should complain officially.)

Many people think that life would be simpler if there were a formula which revealed the right price for each house. There is such a rule: the assessment value used to calculate property taxes. People complain about it too.

Journalists are in the business of reporting what they see. Especially when reacting to colourful events, readers need to judge whether what is reported is accurate and complete. The second part may be the more difficult one since lots of research has shown that people do not always search for missing relevant information. The New York Times has an interesting test (which I failed).

Economics classes offer two important lessons: that markets forces ration excess demand using prices and that markets are self-adjusting. Regardless of a policy maker’s intentions to “fix a problem”, attempts to alter those forces often have unintended consequences because of overlooked adjustments. If the answer were simple, real estate markets would be less interesting.

PS: While it is easy and fun to complain about silly reports, detailed reports should be encouraged.

PA

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