A sticky spot?

"Houses are always a good investment," said a Vancouver taxi driver to me on the weekend. The belief that house prices are a one-way bet is widespread, as is the related belief that owning is always better than renting.

“Houses are always a good investment,” said a Vancouver taxi driver to me on the weekend. The belief that house prices are a one-way bet is widespread, as is the related belief that owning is always better than renting.

Due to the strange absence of Vancouver traffic, however, my ride ended before I could ask him if his view had been shaken by the complete lack of interest in Whistle Bend lots in Whitehorse. The government opened a new wave of Whistle Bend lots to bidding last week, and received exactly zero offers.

It is remarkable that after all those articles about the housing shortage, including in this column, that not a single person wanted to build a new house to live in or as an investment.

Many people view houses as a unique kind of commodity. We all know prices for gas, gold or the Canadian dollar can go down. We see big, expensive things like cars on sale regularly. But there is a strong belief that houses are special.

Part of this is folk memory. In many parts of Western Canada where the population and economy have been growing relatively steadily for decades, house prices have indeed been a one-way bet. In the 1970s and 1980s when inflation was high, even when house prices just kept pace with inflation, it created a powerful illusion of increasing values.

And many house buyers notice a phenomenon which reinforces the belief that house prices don’t go down: even in a buyer’s market, sellers are remarkably resistant to cutting their prices below what they paid for the house. Economists call this “downward stickiness.”

It means that prices don’t adjust smoothly to supply and demand like they do in, say, the markets for corn or frozen orange juice. Orange juice traders don’t get fixated that they paid $1.25 a pound for frozen concentrated OJ, and then hold onto it if prices hit $1.20 and keep going down. If they think prices are going to fall further, they’ll sell immediately and cut their losses.

House sellers are more likely to stick to their price, even at the risk of having to take the house off the market. This is why you often see a fall in the number of house sales – but not so much the price – when the market gets weak.

There are quite a few Yukoners worried about the values of their houses right now. For them, decision-making is difficult. The house is such a big part of your net worth, but is also an asset to which we have such a strong emotional reaction. Orange juice traders selling an unlucky shipment don’t have to paint over the trim on the kitchen door where pencil marks show the kids’ heights as they grew up.

So when thinking about selling, it is good to be aware of all the conscious and unconscious factors affecting your decision-making.

One factor which any heartless orange juice trader would recognize is your belief about where the housing market is going. If you think the low offers you are getting are just a blip, and that the mining industry’s engines will roar back into life next spring, then holding onto the house could be a smart move. There’s a risk, but that’s business.

The danger comes when emotional or psychological factors are driving your decision, even if you dress them up in optimistic beliefs about next spring’s housing market.

One of these is pride. For the last decade, all we’ve heard at barbecues is Yukoners talking about how much money they made on their houses. People seldom talk about their losses. So by selling lower than hoped, today’s seller has to admit to themselves (and the spouses) that they are not as savvy as everyone else at all those barbecues.

As a trader or economist will tell you, however, this is not the right way to think about it. It doesn’t matter if you paid too much a few years ago, or if you made a good decision based on the facts at the time and just got unlucky. What matters now is maximizing value.

Sometimes to avoid a loss, people will hold onto their houses for years longer than they planned. Eventually, thanks to inflation, prices will rise to where the price you get for the house matches the original sticker price you paid. However, with inflation hovering around two per cent, it could take a decade to recover a 20 per cent drop in the value of your house.

And while this allows you to say, “We got what we paid for it,” this is only true in nominal terms. In inflation-adjusted terms you are still down 20 per cent.

Ultimately, the key factor is “opportunity cost.” What would you have done with the money if you had sold at a loss like an orange juice trader? If the answer is “nothing,” then holding onto it isn’t such a terrible decision. But if it means you gave up on a higher-paying job in Lethbridge, or delayed the purchase of your retirement home at Tagish for years, then you might be making a bad decision.

My father once advised me not to get emotional about used cars. It was sensible advice, and it applies to houses too. If you find yourself in a difficult price situation, try to channel your inner orange juice trader and avoid the pitfalls of price pride, money illusion or forgetting about the opportunity cost of holding your house too long.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Twitter @hallidaykeith

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