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May 16, 2019 | Bias

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Normally people are smart. Except when they’re not. When facts are bent by beliefs, logic turns into bias. And what a mess that can yield.

Recency bias, for example. It’s what really screws up investing as well as real estate. This is the conviction that what just happened (recenty) will determine what’s going to happen. For example, during a day or week when stock markets drop (that happened Monday) people think this is the new normal and they’ll plunge going forward. They get scared. They turtle.

But logic tells us at least 70% of the time markets go up because the economy grows. So periods of decline are actually buying opportunities and we should take advantage. But recency bias holds us back. It suggests markets will go to zero.

Same with real estate. W-a-y back in the spring of ’17 house prices were catapulting forward 30% year/year in the LM and the GTA. Folks looked at that, concluded they’d continue to escalate and jumped in for fear of missing out (FOMO). We know how that ended. Conversely today the Vancouver market’s in terrible shape with scant deals and falling prices. People now think this will go on indefinitely, so they fear buying – even when the same house costs tens or hundreds of thousands less than twenty months ago. Recency bias. It cuts both ways.

Then there’s the other one. Confirmation bias. Just as powerful, just as destructive. This is when people notice, embrace and believe information that confirms beliefs they already held. It can lead to racism, ageism or sexism. You might think refugees are dangerous, for example, so any news about a non-resident committing a crime confirms this belief. That could change the way you act or vote, even though logic tells you most in this group are peaceful.

 

We’ve just had a great example.

It seems a lot of people on the West Coast think offshore buyers from China have flooded in to buy properties, escalating prices and sending real estate beyond reach of the locals. They further believe a ton of this money is tainted, dirty, and that property deals are used to launder it. They blame Chinese gangs and criminals, and recently elected a bunch of people who work hard to confirm this bias.

In the last few days the NDP government told citizens that $7.4 billion in such funds were funneled through BC last year, with over $5 billion going into real estate, which raised prices by 5% overall and four times that in Vancouver. “Thousands of properties,” it said, may have been involved, and “China figures prominently” in this activity.

The information confirmed public suspicions, fueled by the media (reporters lapped it up) and people seeking election, plus it supported the government’s agenda. Human nature is consistent. Being a victim means we have a legitimate excuse for any shortcomings. It also allows the government to focus on external forces – us versus them – which is easier than, say, fixing the reason BC has a 3-year waiting list for a family doctor.

The reason this is worth mentioning is the government reports may be suspect. Or sloppy. Or perhaps just massively political and manipulative. Maybe this is a case of leaders telling people what they wish to hear.

A Bloomberg report days ago claims this:

  • There is little or no hard evidence of actual money laundering. If it did occur, the amounts involved are likely much smaller.
  • By far the largest source of any dirty money is the US, not China. In fact, it is six times larger.
  • The methodology of the government reports is suspect. Based on the ‘gravity method’ they guesstimated the amount of dirty money in the entire world, then extrapolated how much should be allocated to BC and locally, making assumptions about what criminals would do. This is not empirical.
  • The study said the amount of money ending up in residential real estate was between $800 million and $5 billion. The government publicized only the highest possible estimate.
  • A government news release claiming Van prices had been increased “upwards of 20%” because of dirty money apparently fabricated that number.
  • In looking at property records, over two thousand transactions were classified as “high risk” in terms of money laundering simply because they had mailing addresses in China or Hong Kong. Talk about confirmation bias.

Are these things correct? You (or I) have no idea where truth lies. But neither may the government. In the absence of facts and statistical verification, it seems allegations and bold accusations leveled at one ethnic group are brash. That the report was accepted at face value, embraced by the media, and now forms the basis of a costly public inquiry, speaks to the depth of bias within the public. Most people want to believe the market is rigged. That would explain a lot.

This won’t be a popular post. I get that. But blaming the tail for the dog fixes nothing. It still bites.

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May 16th, 2019

Posted In: The Greater Fool

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