Tamara and her fiancé figured it was time to move when the pandemic lockdown provided them with more flexible work arrangements. The couple wanted to go from a one-bedroom downtown Toronto condo rental and upsize to a place that had space for work, their big dog, and potentially a family down the road. And when they saw what was happening in the housing market, they worried that it was now or never.

The couple embarked on their home search on the furthest outskirts of the Greater Toronto Area where they could commute, but where, they assumed, there would be less demand and homes would be more affordable. But Tamara and her fiancé were in for a shock.

“We saw 15 houses,” Tamara says. “We put offers in on four. The craziest sale we saw was a home that was much older, not in good shape at all, with a broken deck and cracks in the walls. The home was listed for $599,000. It sold for $965,000.” 

The couple eventually found a detached home in Hamilton, Ont., — an 80-minute commute to the office — that was listed for $799,000. A previous offer had just fallen through at $975,000. They began the negotiations and sealed the deal at $910,000 — a mere 113% of asking price.

For many of us, a home is more than just four walls and a roof. It’s our refuge, and where we build memories. Many people feel buying real estate is a rite of passage into adulthood. Or that a good-paying job and a house in the suburbs go hand-in hand. But the last decade has seen a perfect storm of conditions that has led to pandemonium in the housing market, challenging our preconceptions around house and home. Low interest rates, population growth, and scarce supply has led to bidding wars and homes selling regularly for well over the asking prices. According to the Canadian Real Estate Association, the average Canadian home’s value increased 20% compared to last year.1 It’s no wonder home buying can cause today’s purchasers to lose sleep, stress out, and worry that if they don’t get in now, homeownership will be forever unattainable.

Those feelings can play tricks on our brains and can lead to bad financial decisions. “People usually have a lot of preconceived ideas about what a home means to them,” says Anthony Damtsis, Manager of Behavioural Finance at TD Wealth. “So, we can easily get too carried away and emotionally attached to a home that we see. This can result in blind bidding wars and can drive up home values way past the list price.”

Damtsis talked to us about what’s going on in our heads, the common behavioural psychology concepts that can sabotage homebuyers, their purchases, and finances. By recognizing you’re prone to these behaviours or biases, you might discover when you’re being your own worst enemy. Having a trusted financial professional as your co-pilot during these times can keep you on an even keel and help guide you to making smart, less anxious choices. Here are a few ways our brains may be getting in the way of a good decision.

We are really afraid of regretting a bad move

What it is: The behaviour, “regret aversion,” has a more common name: FOMO or fear of missing out. Regret aversion occurs when a decision is made out of fear of feeling sorry about choices made in the future.

How it impacts home-buying: Regret aversion may cause buyers to panic and get into the market, perhaps at an inopportune time. Buyers may worry that prices will continue to climb and they fear they will regret the missed opportunity to buy in when prices are still relatively affordable. It can also cloud judgement when trying to purchase a home or engaging in a bidding war. This behaviour may cause you to overbid on a home if you think you’ll regret losing the home to another buyer.

How to think clearly: Damtsis suggests thinking about how poorly you might feel if you learned that you overpaid for a home. The fact is that there are many outcomes that can make us feel negative emotions, aside from regret, including feeling the financial stress of overpaying for a house. 

We think we’re fortune tellers

What it is: Called the “representativeness heuristic,” it’s a mental shortcut we use when estimating the future. When we’re trying to assess how likely something is, we place considerable weight on how things look right now, and discount the possibility that things could be different later on.

How it impacts home-buying: We think that home prices are rising and that they will unequivocally continue to rise at the same rate, forgetting that we can’t foretell the future and that the world is full of surprises. This can also apply to low interest rates: We may believe that interest rates are low now and our monthly mortgage payments will stay affordable. In fact, we shouldn’t kid ourselves that rates will always be this low.

How to think clearly: The representativeness heuristic is a “short-cut” that the brain uses to save mental energy. If we can put things in neat categories, it makes it easier to create our perception of the world. Damtsis says one way to avoid it and correct your judgement is to think about all the ways your assumptions could be wrong. “We call that a pre-mortem,” says Damtsis. “Just thinking about all the ways things could change and scuffle your plans could be a valuable exercise.”

We think we’re the experts

What it is: The “Dunning-Kruger effect” is a psychological phenomenon whereby people are generally over-confident in their abilities and everyone thinks they’re an expert.

How it impacts home-buying: More and more people are leveraging their first homes to buy more income property. As prices skyrocket, recent data from the Toronto Real Estate Board suggests people who own more than one property in Ontario make up more than 25% of buyers in the province.2 When we see others in our social circles jumping into income properties, we assume this must be a fool-proof way to increase our cash flow and build our wealth. But the hard truth is that making money in real estate can be complicated.

How to think clearly: Realize that there are real experts that can help you along the way. Reach out to a financial advisor and understand the true cost of owning an asset before you decide to hop into the world of investing in real estate and income properties.

Damtsis says that even without the current market mania, buying a home is a draining experience emotionally. To keep you on the straight and narrow, he says that a financial advisor can help ensure that you have a realistic view of what you can afford, both now and down the road, and prevent you from over leveraging yourself amid the real estate frenzy. 

Tamara finally found a home. And she says that she didn’t just rely on a competitive offer to secure the purchase: She realized that the sellers could also be prone to emotion as well. She wrote a letter to them explaining her circumstances and promising that the house was going to a family that would love, cherish, and care for it. The realtor reported that the sellers, the daughters of the man who owned it, cried when reading her note. Their father had recently passed away and the letter went a long way to helping them feel better about selling the family home. “Emotions can play a big role on both sides, and perhaps humanity hasn’t entirely left the market after all,” says Tamara.