In the first half of 2022, GTA’s real estate experienced a huge contrast in sentiments.
In the first half of 2022, we tracked the sentiment of most real estate markets and saw a huge contrast between Q1 and Q2.
Thinking of the hustle and bustle of the first quarter, the voices of customers are endless:
“I haven’t bought a house all the time, but now the house price has risen, so I’m very anxious”
“I’ve been waiting for a year and the house price has gone up by 20%, I can’t wait any longer; I would have bought it if I knew it was the first viewing”
“My friends around me suddenly bought houses, and I feel a little behind.”
“My classmate bought 6 sets of investments at a time, and it jumped 20% in three months”
“I’ve decided to retire with 10 investment properties and financial freedom”
“No more than 2.2 million, I will definitely not sell it”
There is a powerful emotion called: Fear Of Missing Out (FOMO, Fear Of Missing Out)
It began in 1996 with a research paper by marketing strategist Dr. Dan Herman, who coined the term “fear of missing out,” or FOMO. FOMO is a strong feeling of not wanting to be left behind. While it may have been around for centuries, it has only been studied in the past few decades. With the advent of social media, the FOMOt has become an accelerated phenomenon. Because social media shows bright spots in other people’s lives, dazzling people.
The outbreak of the epidemic in March 2020 made all people’s fear more concentrated: the fear of missing out on a happy life. When life is threatened by the virus, everyone wants to do their best to seize every ray of hope and beauty! In the time of the epidemic, this beauty is more concretely expressed in a spacious house, a safe space that can accommodate more relatives. Some people have been working hard for a good job, and suddenly realize that they are afraid of missing the moment of family reunion and well-being.
During Convid time, it is very obvious that those beautiful and comfortable houses are the most popular! After decades of inertia, people’s preference for houses in the city center has started to change to become more suburban and decentralized. What causes such a large amount of energy to change an inertial direction? I agree it’s FOMO!
Multiple Bully Offers were the norm in crazy Q1 2022
The seller normally clearly informs the buyer of the date and time of the bidding procedure when listing their homes for sale; Bully Offer occurs when the buyer submits an offer before the seller’s preset bidding date. Why would the seller accept the Bully Offer? When the market is fierce, the seller will expect as many people as possible to participate in the bidding, while for both the buyers and sellers, the emotions flowed with the whole procedure. As a strategy to fight other competitors some buyer choose to apply the more aggressive method by submitting a Bully Offer in order to get the house and also avoid the painful process of bidding with others. Naturally, this Bully Offer needs to be perfect, at least equal to or exceed the seller’s expectations, in order to be accepted by the seller.
In the first quarter of 2022, Bully Offers from multiple buyers have become the norm, showing that people’s emotions are pushing prices to the extreme in an overheated real estate market. The buying agent normally started the conversation: Can I give a Bully Offer, the price is around 1.5 million; the selling agent will politely answer: Are there any conditions? If the buyer says no, the negotiation can continue, and the seller will hint about the price: The houses in the same community have been sold for nearly 1.6 million, for your reference…
In the first quarter of 2022, the rising price of the real estate market functions like a beautiful filtering glass, which makes people see all the houses NICE, no matter how far away, how shabby, how small… Houses made of Stone, Cement, and Wood, shined like gold, pursued by buyers. The seller was very tactful at first, but later told the buyer bluntly: We don’t like conditional offers, and we hope to find a buyer with vision and strength who is worthy of our house!
In the first quarter of 2022, home sellers are thinking of another competitive logic
A strong seller’s market is called a seller’s market. At this time, Buyers do admire the advantage position of the Seller. While the seller is engrossed in another competitive logic:
Suppose I am a seller who is about to sell a house. I recently saw a neighbor’s house sell for a record high price, and then another neighbor hit a new high. Isn’t this a blink of an eye, and the house price will go up? So I can easily estimate the sale price of the third neighbor’s house. If the third neighbor sells for a better price, as I expected, I can almost certainly forecast a higher and stronger price for my house.
This logic works in the short term, otherwise, my predictions for the third set wouldn’t be correct, but I can’t predict exactly: what’s the end of the crazy time? It turns out that this crazy period is really short-lived. Next, the huge contrast after the inflection point of the market in the second quarter completely eliminated the two confusions that sellers were still struggling with: First, should I list the house for sale now, if the house price continues to rise, it means I will lose money; Two, what should I do if I got 10 offers but still not reaching my expected price?
Q2 the market tilted towards the buyer amid interest rate hikes by BOC. Sellers now experienced a lot of offers to no offers, low-pricing list strategy to market price strategy, then lowering the price, delisting, and re-listing; then listing at a low price and re-strategizing cycle…
The shrinking of transactions means still a big difference for both buyers and sellers. Compared to the hustle and bustle of the market in the first quarter, the market in the second quarter was quiet. Davis Rosenberg reminded everyone at the beginning of the year that soon all people will care about is a recession.
Q2 2022, many people do not believe that a pure rise in interest will have such a big impact on real estate.
Many people don’t believe that a purely theoretical rise would greatly impact real estate. For example, I remember when the rate hike at the end of February was 25 basis points, which was very mild, like the bite of a small mosquito, and some people were frightened. The voice of “severely lower than demand” has greatly occupied the mainstream of the market; the second rate hike of 50 basis points in April, the market has obvious signs of cooling, and the voice of “rate hike hawks” has risen rapidly in the media; Three interest rate hikes of 50 basis points, the frequency of interest rate hikes have exceeded many people’s expectations, but many people think this is the end of this year’s interest rate hikes. While the fact is that Canada’s major banks are speaking out about more interest rate hikes and tightening measures, and even so I see a lot of people with disbelief.
On July 13, 2022, the increase of 100 basis points of interest rate of the Bank of Canada will hit Canada’s real estate!
Why is the increase of 100 basis points in the central bank’s interest rate on July 14 a heavy hammer on the real estate market? All continuous interest rate hikes before the end of June have indeed increased the cost of loan interest, but the maximum loan amount affected by the stress test will not be reduced; however, after the central bank raised interest rates by 100 basis points in July 13, the effective stress test interest rate will be floating. Rates are close to 6%, up from the previous level of 5.25%; the stress test rate for fixed rates is closer to 7%. In short, when people apply for a mortgage, they will immediately feel a decrease in the amount of the loan, which will affect their ability to buy a house price.
If “housing supply is significantly lower than demand,” then reducing the amplified demand is naturally a good way to regulate demand. The development of real estate and loan financing in modern society has deeply amplified credit, amplifying the consumption needs of all people who can borrow, including cars and houses. You might wonder this time, why changes in interest rates are so sensitive and effective for real estate!
In the second quarter of 2022, when the market calmed down, people began to realize that the market madness of the first quarter was not sustainable!
Perhaps the strong force of fear of missing out, stimulated by low-interest rates, has seen 50% of the housing prices in Canada in the two years of the epidemic. Even with second-quarter real estate adjustments, the average GTA price in June 2022 was 5% higher than a year earlier and 32% higher in May 2020. Maybe this is when people have time to look back at past prices.
It’s like drinking alcohol, or beating chicken blood, when we are crazy, we will feel: People think that the price will go up indefinitely. I feel that I am also a figure like a stock god, and a touch of stone turns into gold; even if someone reminds that similar bubbles in history have burst, they always feel that this time is different.
The reason why I want to record what I see and feel is that I believe that most people don’t remember history, including myself. We can re-read until the market experiences a similar hustle once again. Like a colleague told me in April 2017…
We are heading for a pessimistic housing market sentiment
Participants in the real estate market are affected by emotions all the time. A quote from Howard Marks “Investors’ psychology and emotions are like a pendulum swinging back and forth between greed and fear.” The magnitude of the market’s rise or fall, with huge human emotions involved and fueled by it, is the norm in the market. If we can, we have to train ourselves to find an objective, rational, neutral balance in an analytical position.
Yes, the pessimism in real estate is now magnifying, so it should also be understood that fear may also lead to an exaggerated adjustment in the market. How to be objective and rational? I always thought it was a safe way to start with calculations. Do a calculation for your financial situation, set up a few more options for those variables that need to be predicted, and prepare solutions for the possible outcomes of different options…
In the next article, I will focus on the financialization of the real estate market, and by the way, answer a puzzling question: Why did the interest rate hike cause the real estate market to fluctuate violently?