Canada’s housing market is hurting your brain, but you don’t have to lose your head over it

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In years to come, some researcher will surely mark the phases of the pandemic by what we raced to buy: toilet paper when we feared a virus we knew little about, dogs when we sought company during lockdown and now houses as we crave security – and square footage – in an uncertain future. Home has never been more of a haven. And yet, for many Canadians, cooped up with working and studying family members, their homes have never felt so cramped. Have we ever so desired a little more room to breathe? This may be the most rational conclusion of a strange and unprecedented pandemic: As the world got smaller, our desire for personal space grew larger.

And yet, when Canadians went looking for it, reason went out the window. With supply short and demand high, home prices have reached stratospheric heights, armies of buyers have engaged in bidding wars, and even smaller cities have seen the cost of a family home quickly outstrip what middle-class earners can reasonably afford. Despair and panic sets in: If you don’t get a home now, will you ever be able to buy one?

Not long ago, the Bank of Montreal released a report stressing the need to address the “psychology around the housing market” and in particular the FOMO – fear of missing out – that appeared to be its own epidemic in Canada.

But that’s a bit of a misdirection. It suggests buyers are the ones acting irrationally, that it’s their mad rush to have what their parents and grandparents had that is nonsensical. If only they had a little perspective – a dose of cognitive realignment – the buyer would see they were being unreasonable and make better choices.

Let’s be polite about it and quote those house-happy grandparents: This is a load of hooey. Talk to psychologists, behavioural economists, even addictions experts, and you quickly see the system is rigged to play on our fears and biases.

Of course people feel FOMO – every real estate ad, home-reno show and social media post is designed to trigger it. We covet that ensuite bathroom because we have been primed to want it. We feel opportunity slipping away because this dire message is blasted on repeat like a warning siren.

And when buyers are willing to make an offer, what happens? They’re pitted against each other like gladiators – if all the other gladiators were invisible. Reason requires information. And yet we have more information when shopping for toilet paper than when making the biggest purchase of our lifetimes.

What’s to be done? Economists and policy-makers are deep in a well-needed debate about means tests and taxes, foreign investors and house flippers. Eventually, the rules may change, but today’s frustrated buyers are already deep in the game.

Understanding how assumptions, emotions and cravings make you vulnerable to bad choices – and how your gut can guide you to smart ones – is one way to find more solid footing in an out-of-kilter market.

Ryan Foley and Sarah Tassielli, a pair of 30-year-old professionals in Toronto, can’t find a house. They’ve been at it for months, spending evenings searching online and weekends at open houses. So far, they’ve bid on five properties, and even when they thought they might be close, the houses sold for significantly over asking. One house, they say, had 49 offers.

On paper, they should have excellent prospects. They both have good jobs: Ms. Tassielli works in marketing for Telus, Mr. Foley as a kinesiology lab technician at Ontario Tech University and working toward his PhD. They have a “sizeable” down payment for a house worth somewhere between $700,000 and $900,000, and a combined household income of $200,000. The pandemic delayed their wedding but also made them keen to upgrade after four years of living (and now working) in a 500-square foot apartment. But stability, savings, motivation – none of that is enough. As Mr. Foley put it in an email, they are Two Incredibly Frustrated First-Time Home Buyers. Like many in their situation, they’re afraid they’re going to miss out.

The now-ubiquitous acronym FOMO is credited to Patrick McGinnis, a Harvard University student, who used it in a newspaper article to describe the ache he felt that everyone was living a better life than he was. As a concept to sell stuff, however, it made a brief early appearance in a 2000 paper published in the Journal of Brand Management written by marketing strategist Dan Herman, who described the modern consumer as someone “led by a new basic motivation: ambition to exhaust all possibilities and the fear of missing out.” But FOMO isn’t a modern condition: The phrase “Keeping Up With Joneses” dates back to a comic strip created in 1913 about a family trying to keep up with the family next door. It’s only that social media has made it worse; we don’t have to go outside to see the shiny new car Mrs. Jones is driving.

A little FOMO might be motivating. But too much has been associated with depression, anxiety and loneliness, especially in teens. No age group is immune, as advertising execs well know. A website touting 29 ways to increase a buyer’s FOMO in online ads includes these suggestions: hint at how many people are looking at an item right now and how many people have bought it already; add a clock ticking down on the “sales” price; and play on a consumer’s desire to avoid regret down the line.

FOMO also capitalizes on what’s known as the Self-Determination Theory, the hypothesis that humans have three basic psychological needs: to feel competent, to have a sense of belonging and to have a sense of control. FOMO toys with all those needs by making us devalue what we already have and desire what we don’t. When it comes to social comparison, says David Hardisty, an assistant professor of marketing and behavioural science at the University of British Columbia’s Sauder School of Business, “we just tend to notice more whenever when we are behind than when we’re ahead.”

Meanwhile, a national lockdown has given everyone plenty of time to stare at their current four walls and find them wanting. Buyers can peruse endless photos of staged houses and slick, drone-shot videos of places where other people are definitely, absolutely, living happier, and certainly tidier, lives. Ms. Tassielli, who works in marketing, suspects plenty of those visuals are enhanced – certainly living rooms and bedrooms look larger and prettier online than in reality. One Oshawa home clearly had a fake sunset added to the view, she says, but admits it’s still hard to resist imagining yourself in that space.

James MacKillop, a psychologist at McMaster University, studies how environment influences our desires. He has a bar in his lab to study how people with addiction respond when placed close to to alcohol. “Addiction,” he says, “is really just an extreme form of overconsumption.” A house we can’t afford is not that different from a rum and Coke we shouldn’t drink.

In his research, being around alcohol – even being shown pictures of it – increases cravings. Real estate’s “high-octane” marketing, he suggests, triggers a similar effect: “You’re creating demand and driving up appetite, and making people less sensitive to escalating costs.”

And the pandemic, Dr. MacKillop says, has created a perfect storm of irrational decision making. But merely being aware of that behaviour can temper it. His research shows that “if you simply wait it out, the feeling will pass.”

Until the next time, at least. Realizing they were a “bit addicted” to virtual house shopping, Mr. Foley and Ms. Tassielli decided to take a break. “That lasted one week,” says Ms. Tassielli, until their realtor sent an email about a promising house they’d almost missed – and they were back on the FOMO treadmill.

Then comes the bidding war, fought in the dark.

Economists have wrestled with the irrationality of human beings for centuries. “Feelings were these annoying gusts of wind that threw off your navigation,” says Sam Maglio, an associate professor of marketing and psychology at the University of Toronto Scarborough. That’s not wrong. A long, frustrating day at work tends to spill over at home. Whether it is rainy or sunny influences our moods. We’d be foolish to ignore how the current anxiety and discontent around the pandemic might be fuelling our wants and needs right now.

But emotions can also be useful cognitive guides. In a variety of experiments, including some conducted by Dr. Maglio, subjects have been asked to make choices about consumer goods or vacations, either by going only on the facts or by relying on their feelings, as well. He has found that those who go with their gut feel better about their decision than those who stick to objective facts.

What’s also interesting, he says, is that feelings don’t lead to snap judgments; both groups take roughly the same amount of time. Savvy consumers, Dr. Maglio suggests, should “let intuition do its thing and work its magic.”

This idea is supported by Unconscious Thought Theory, an influential hypothesis in behavioural economics. It proposes that while conscious thought may be better for simple decisions, like choosing toilet paper, complex decisions are better left to the unconscious.

In one experiment, the theory’s Dutch authors, Ap Dijksterhuis and Loran Nordgren, asked subjects to choose the best apartments based on detailed information on four units. Those who were distracted more often made the best decision compared to those left to deliberate about their choice. Prof. Nordgren has compared conscious thought to a flashlight that can only illuminate certain facts at a time, while your unconscious takes in the whole picture.

But in those experiments, all the subjects were given plenty of information to feed to their unconscious. That’s not the case with bidding wars.

Buyers don’t know how much the sellers want – although it’s likely more than the house is rationally worth. They don’t know who they’re bidding against or what those other players are willing to spend. And since the market is moving so quickly, they often don’t have time for a home inspection or even a second look.

“It feels like I have literally spent more time buying a pair of shoes for $40 than bidding on a house,” says Ms. Tassielli. And with the shoes, at least she had the chance to try them on first and return them if they didn’t suit. The price was clearly marked, and she could comparison-shop for a better deal elsewhere.

As Polish economists wrote in a 2018 paper on the psychology around home-buying, real estate is an imperfect market: Prices are strategic placeholders, true value is unclear (even on the same street), and the product is hard to compare. “Consumers seek to make optimal purchases with the data they have,” the authors observed. But they also fill the gaps with perceptions and best guesses, not all of them rational.

The dynamics of bidding wars – the gambling and strategizing for a coveted item – capitalize on the herd mentality. The uncertainty around pricing adds more confusion. In experiments, people will often place more value on the difference between $100 and $200 than $1,100 and $1,200. A 2014 study in the Journal of Real Estate Finance and Economics found that listing a home for $1 less – say $699,999 rather than $700,000 – leads to a higher selling price because we focus on the first number in a row.

Once we’ve entered the fray, we often adopt an overly optimistic view of the outcome. And our competitive spirit is heightened. As Mr. Foley says, “It is a game, at the end of the day. And you want to win.”

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The best way to fight FOMO is to know when it has its hold on you, says the acronym’s originator, Patrick McInnis, author of a recent book on the subject. Ideally, you would step off the path of the herd and consider exactly what you’re chasing. Do you really want it? Can you afford it? “If you’re spending 24 hours a day on the internet looking at houses, are you okay?” he asks.

But being mindful of the psychological traps doesn’t change reality. Many Canadians want to be homeowners, and unless the market slows drastically, that won’t be a feasible option for an increasing number of them.

Relinquishing that dream isn’t easy. In some countries, such as Germany, renting is a way of life, even for those who could afford to buy. But Canada is a spacious country of immigrants, for whom owning their own piece of land is a symbol of having officially arrived in their new home.

Mr. Foley’s maternal grandparents, for instance, arrived in Canada from Sicily in the 1950s, rented for a decade and, on his grandfather’s salary as an asphalt paver, eventually bought a home. “They were extremely proud of their house and the success it signified as they established their new life in Canada,” he says. On Ms. Tassielli’s father’s side, the story is similar: Her Italian grandparents worked at a car factory in Windsor, where they bought a house and, eventually, a larger piece of land for their gardens.

It’s in our genes: Homeowners beget homeowners – or, at least, the expectation of becoming one. “Our parents can’t even wrap their heads around the fact that we can’t afford a home, because it was so attainable for them,” says Ms. Tassielli. She and Mr. Foley took her dad to showings one weekend to help him understand what they were up against. Though they both have successful careers, owning a home, Ms. Tassielli says, “almost feels like a necessity to be taken seriously as an adult. I guess I am just trying to grow up and buy a house.”

Home ownership is associated with a greater sense of well-being and stability, but European research in the past decade suggests that’s because the family that can afford a home has more financial resources and social capital in the first place. A home is no guarantee of happiness, especially if the owner is stretched financially or even if they bought in a less desirable neighbourhood than their peers. There’s always a Jones family to suggest you’re not keeping up.

Dr. Maglio understands it can be hard to “step back and see the full chess board.” But his best advice to homebuyers caught in the current market is to pause and think about how they’d counsel a friend in their own situation. “Looking at your life like a fly on the wall can give you a better perspective,” he says.

Ms. Tassielli and Mr. Foley are still house-hunting every weekend. They have their budget, and they’re sticking to it. They won’t be fooled by fake sunsets. They’re trying not to fall in love with what they don’t have. But being smart and mindful won’t necessarily get them a house; right now, reason only gets a buyer so far. As time passes and prices keep rising, they can see opportunity passing them by. Says Mr. Foley, “You really feel it slipping away.”

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