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SALES SLOW...INVENTORY GROWS

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In June 2018, Central Mortgage and Housing Corporation(CMHC), released the results of a survey of home buyers who purchased a home in 2017 in the Montreal, Toronto and Vancouver Census Metropolitan Areas. The objective was to determine buyers’ attitudes as to factors drive the market, particularly prices. The study was an effort to explore “behavioural economics” or what the layman might term the psychology of buying. The basic thesis being that the human brain has a natural draw toward stories, whether they are factual or not, and these stories have a powerful impact on ones’ financial decisions. The survey results confirm the strong perception that foreign and domestic investors are driving up prices in Vancouver and Toronto. In fact, this influence is perceived to be stronger than supply constraints and demand side factors such as employment and population growth and land scarcity. The story as portrayed in the media is that foreign buyers arrive with suitcases full of dollars and outbid local buyers. This perception contrasts with the reality that nonresident home ownership is only 4.8% in Vancouver and 3.4% in Toronto. Between 2010 and 2017, the average sale price of a residential property moved from $675,853 to $1,031,546 (+52.6%) in Vancouver, from $432,264 to $823,874 (+90.6%) in Toronto and from $297,621 to $364,510 (+22.5%) in Montreal. Studies have shown that sustained price growth such as experienced in Toronto and Vancouver, leads to confidence in the market and optimism about future price growth. This is reflected in the survey findings that in Vancouver and Toronto 48% of home buyers spent more than they planned versus only 24% in Montreal and about 55% of home buyers experienced a bidding war in Vancouver and Toronto compared to 17% in Montreal. The data suggest two potential factors at play. First, media reports of “bidding wars” and “fear of missing out” in a rising market impacts how much the buyer is willing to spend. And second, strong markets, or “hot markets” as cast in the media in themselves impact the perceptions of home buyers on expectations on future home prices. In other words, strong markets as evidenced by sustained price growth tend to be self-reinforcing, and in fact may contribute to price growth beyond the usual “supply/demand” factors that are the focus of economists. While the CMHC study is not conclusive, it suggests that there are many factors that influence the real estate market.