The lockdowns and social distancing routines in 2020 made many people re-evaluate what was important, what they wanted more of in their lives and what they wanted to have less of when things when back to normal. At the same time, the COVID pandemic gave some important lessons about real estate and challenged some common wisdom.
We worked with lots of clients over the year and we’ve taken what we’ve seen and learned and distilled it into three important lessons taught to us in 2020. Here we go!
Intrinsic beats instrumental
Decisions are often made from either an intrinsic or instrumental perspective.
An intrinsic perspective focuses on the inherent value or worth of the action. It is doing something because you want to do it, not because you hope or plan for it to lead somewhere else you want.
An instrumental perspective views the action as useful primarily in that it is an instrument to lead you somewhere else. The decision was made because of where you believed it could take you, not solely for the interest of the activity itself.
A non-real estate example of an intrinsic approach would be going back to school to study a topic for the love of the topic. An example of an instrumental approach would be going back to school because you believed it would allow you to transition to a different career or achieve a different role. The study itself was not the point – it was where it would lead you.
In real estate, some properties have intrinsic value and others have instrumental value. A home that is located in a desirable neighbourhood is intrinsically valuable in its own right. A home that is located in good proximity to a workplace, a desirable retail area or transit stops may be only valuable in that it is useful as long as it serves as an instrument to accomplish something else – easy commute to your job, a short walk to your preferred local amenity, or quick access to other parts of the city via transit.
During 2020, we saw many properties that were deemed valuable due to instrumental reasons lose that value as what people valued changed. When working from home because prevalent, proximity to work was less valuable in a home. When restaurants, cafes and shops closed, the ability to be a short walk away from a retail strip was less valuable. When the need to travel for work or leisure lessened, transit stops were perceived as less important.
At the same time, homes that had intrinsic value did very well. Houses in neighbourhoods that had community features and outdoor space that could still be utilized during the pandemic retained their value. People who loved their home due to the home itself, rather than what it connected you to, saw an increase in value.
While all homes have some mix of intrinsic and instrumental value, those that were largely valued due to what living there provided access to saw a significant drop in appeal in 2020. Condo apartments were most negatively affected by the pandemic, as many people had chosen to live in condos despite the space and privacy constraints. With the instrumental aspects of the property removed or diminished, prices for condos dropped by 4.7% in 2020. This equated to over $30,000 in lower average price from December 2019 to December 2020.
The lesson here is clear. If you rely heavily on the instrumental value of a decision or asset, you are vulnerable to a change in where the decision was leading or why the asset was valuable. As what we consider important changed, properties that were intrinsically valuable did very well in 2020.
Common sense isn’t always reliable
One thing that became abundantly clear in 2020 was that predicting what comes next was the realm of optimists and fools.
At the start of the pandemic, everyone and their mother made predictions as to the impact of the coronavirus, the likely way it would play out and how that would impact society.
In real estate, common sense said that as people grew worried about being exposed to the virus, real estate transactions would shudder to a halt as many other businesses did.
In the GTA, we had about one month where that was true and then we saw a progressive recovery that ended up exceeding previous years in many metrics. The prevailing logic said that we would see sales dwindle to a trickle as people stayed home and waited out the pandemic.
Instead, we saw the emergence of two very different real estate markets in Toronto and the surrounding areas, with condo buildings faring poorly and freehold homes with separation from neighbours and the world rising monthly in value.
There is a very human tendency to try to reduce complex situations to more simple equations and posit a simple sort of causality. People are scared to go out, so no one will buy. Many buyers saw their job security diminished and they will wait to buy until they feel more certain.
With multi-directional causality, these simple predictions were often wrong at the larger level. Certain subsets of the economy were strongly impacted in a negative fashion by the pandemic and other subsets saw things improve compared to the previous year. First-time buyers with less job seniority and a greater likelihood of service oriented jobs saw tremendous uncertainty and the low end of the market suffered accordingly. Middle to higher income earners saw their positions stay largely secure and depending on their industry, they may have even saw an increase in revenue for their companies.
The lesson here is that when we’re dealing with complex situations with powerful forces impacting from different directions, simple causality predictions are often wrong. Such situations create powerful micro-markets where specific price points, housing types and locations are impacted in varying degrees. There is no such thing as “the” real estate market and in a period of significant societal change, that is more true than ever.
Shelter is fundamental
The final lesson that came out of 2020 is to recognize that fundamental needs occupy a different space in the emotional, financial, and political realms.
From initial panic about the availability of cleaning supplies and toilet paper to decisions about which business are essential during a pandemic, we saw emotions trump financial concerns and influence political decisions.
While real estate is a favourite topic of conversation in Toronto and beyond, when we are uncertain about the world beyond our front doors, the reminder that housing is a fundamental need (shelter) made how we treated real estate far different than other, less fundamental parts of society.
At the municipal, provincial and federal levels, political decisions were made to reassure people that they would be able to remain safe in their homes. The real estate market in 2020 was largely propelled by the historic low interest levels available for mortgages. This was in turn a function of government policies to buy bonds and in so doing, directly impact the low rates lenders were willing to offer on mortgages.
At the same time, tenants were offered extraordinary protection against eviction, with landlords unable to evict tenants for the majority of 2020. Real estate transactions took place despite considerable restrictions in the ability to show properties for sale. The industry as a whole adapted and over a few months developed systems and processes designed to safeguard both residents of properties for sale as well as potential purchases and real estate agents on both sides.
The lesson that came out of 2020 in this regard is that there are powerful players in the real estate industry that are willing to take measures to ensure stability during periods of uncertainty. Regardless of whether the real estate market “should” have crashed in 2020, governments and lenders worked to adjust the system to allow it to continue to grow.
Whenever we have a crisis, fundamental aspects of life (shelter, food, health) will be supported in many ways to preserve societal cohesion. The regular rules that may apply to sectors that are fundamental will be adjusted and in many cases abandoned in order to make sure people have these needs met. Anyone who thinks that normal rules of supply and demand, free market economy and other standards will apply during extraordinary circumstances is bound to surprised by what comes next.
In many ways, 2020 was a difficult year for most people. The lessons that can be learned from it in real estate can be applied in other aspects of life.
Focus on things for what they are, not what they could get you, because where you want to go (and their ability to get you there) can change.
In periods of intense change, narrow your focus if you’re trying to decipher causality. Generalizations may prove to be less reliable the broader you make them.
Finally, never underestimate the importance of fundamental needs. It is easy to get caught up in marketing and confusion around what’s truly important, but when there is a crisis, you see how people focus on core needs like shelter.
It’s been quite a year and we’re glad to be moving into a new year, with new understanding of what might come next. If you have re-evaluated what is important to you and want to work with people who have done the same, get in touch.