In the late 1980's economists Robert Shiller and Karl Case began to challenge the long standing assumption that all home buying decisions are rational when they began interviewing home buyers and sellers to really understand how they make decisions in boom and post boom real estate markets. These were the early days of a branch of economics called Behavioural Economics that began to consider how psychological and social factors influence one's decisions.
What they found was that views about the real estate market – in particular during booms and busts, were not always rational. As an example, they found that when prices were rising rapidly in a particular city buyers often turned to simple clichés to justify the increase in prices rather than any concrete evidence. The two most common clichés they heard were:
Housing prices have boomed in X City because lots of people want to live here
The real problem in X City is that there is just not enough land available
It is interesting that the same stories used by buyers 30 years ago to justify booming house prices in their cities are the same ones we are hearing today in Toronto.
Now these stories may have made sense if Toronto’s population was actually soaring, but it’s not.
The most recent Census showed that Toronto’s population grew at its slowest rate in over 40 years. The chart below from Maclean’s shows the population growth rate from one census year to the next.
One of the key findings in Shiller and Case’s research was that even when the actual data regarding population growth contradicts the cliché – as it does in Toronto - people will still turn to the cliché that “lots of people want to live here” as a way to try to rationalize the irrational growth in house prices.
For some reason people tend to put more value in clichés than actual data.