Is now a good time to buy a house in Ontario? Behavioral economics
Behavioral economics suggests that people are not always completely rational and tend to be impulsive, and that people’s mistakes in decision making are determined by inherent psychological biases. A common psychological bias in the process of purchasing a property is called the endowment effect, also known as aversion deprivation. It refers to the fact that when a person owns an item or asset, his estimate of the value of that item is greater than the estimate he would have had if he did not own it. When applied to real estate, people often feel that their house is more valuable than their neighbor’s house, despite the fact that the neighbor’s house is actually better.
Is now a good time to buy a house in Ontario? Mental accounts
Another common psychological bias is called “mental accounts”. This theory suggests that people divide their expenses or income into different accounts in their mind, for example, classifying wages into a “hard work account” and bonuses into an “extra reward account”. The money in these accounts is also used in different ways. For example, hard-earned wages may be more carefully spent, while bonuses may be spent in a more lavish way. When it comes to real estate, people tend to perceive the investment in owner-occupied properties to be different from that in investment properties. They always feel that the investment in owner-occupied properties is warranted, while the investment in investment properties always seems to show as a loss.
These common psychological biases may cause people to deviate from reality and make emotional rather than rational choices when choosing a real estate investment. The reason for these biases is due to the wide variety of outside voices. We are unable to judge the authenticity and reliability of outside voices, and therefore are easily misled and can blindly follow others.
Click here to know more: Is now a good time to buy a house in Toronto? The impact of land on housing prices