The Great Canadian Bezzle: How Complacency Fueled the Property Boom
In 2021, in a suburb of Toronto, a bidding war came to an end. The winning offer, which is tens of thousands of dollars above the asking price, is submitted without a condition for a home inspection. The selling agent celebrates what they call a "strong, clean deal." Meanwhile, the buying agent reassures their client that in this market, hesitating is the only real risk.
Prolonged periods of prosperity can lead to complacency, which in turn fosters a tolerance for risk and a relaxation of scrutiny. It is in this environment that the "bezzle", the inventory of undiscovered financial folly, grows.
Canada’s property market, long supported by a favourable combination of low interest rates and unwavering confidence, is a prime example of this phenomenon. In this market, realtors often act as unwitting perpetuators of financial misrepresentation, while home buyers embody the spirit of risk-taking.
The Canadian real estate market experienced a surge in prices and underwent a significant psychological shift in which the perceived absence of risk has become the most prominent risk itself. This environment led to a systematic lowering of due diligence, elevates transaction intermediaries to the role of de facto risk assessors, and created a fertile ground for misrepresentation and misguided investments.
Now that the correction has arrived, it has not only adjusted prices downward but also revealed the hidden bezzle that accumulated as people abandoned economic fundamentals when justifying property valuations.
Breaking Down the “Bezzle”
1. The Cycle in Attitudes Toward Risk: From Prudence to FOMO
In the decade marked by historically low interest rates and consistently rising property prices (2009 to 2022), the mindset of Canadian property buyers shifted significantly. They began to believe that "property markets have the highest returns and are virtuallt riskless." The concern shifted from overpaying or buying defective properties to the fear of being permanently priced out of the market.
Aggressive bidding became the norm, replacing a more cautious approach to property valuation. The traditional practice of securing inspections or financing clauses before making such a significant financial commitment was increasingly viewed as an unnecessary expense. Due diligence was not simply reduced; it was seen as a potential barrier to closing a deal.
2. The Bezzle and the Realtor as Intermediary
John Kenneth Galbraith concept of the "bezzle" refers to the temporary wealth that exists between the point-in-time a misrepresentation is made and its eventual discovery.
In a market frenzy, conditions are ripe for "a good bezzle." Trust is high, scrutiny is low, and financing is readily available. In this environment, realtors, who are tasked with facilitating transactions and often compensated based on successful completions, become crucial players. While they may not be fraudsters, their optimism can contribute to systemic pressures that inflate the bezzle.
Information Asymmetry: The advice from buying agents to waive conditions reduces transactional friction and the risk of deal collapse, but it also removes an essential verification tool. Meanwhile, selling agents often focus on staging and narrative-building, highlighting potential benefits while downplaying existing problems.
Price Justification: Comparative market analyses, based on recent sales in the same euphoric market, serve as self-reinforcing proofs of value, resulting in a circular logic that ignores fundamental economic principles, like local incomes.
The Mosaic Unseen: The complete picture is often a mosaic of details. A crack in the foundation, a tricky clause in the strata minutes, or an upcoming special levy may not, in isolation, derail a deal. However, in a rush to finalize agreements, the process of assembling this mosaic is discouraged, leading to the dismissal of these critical snippets. As a result, the bezzle, the gap between perceived security and actual condition, widens.
3. The Canadian Specifics: A System Primed for a Correction
Illiquidity as a Shield (and a Trap)
Think of your home as a family painting that everyone in your town insists is a priceless masterpiece. Unlike stocks, homes don’t sell every second, so you never see their prices fluctuating wildly on a screen. There’s no daily ticker indicating that your home’s value dropped by 5% today. This stability makes you feel secure and reinforces the belief that your wealth will only increase.
However, this perception is an illusion. The price of a home is only established when a sale occurs, and for years, only eager buyers were raising their hands in a frenzy. This created a single, soaring price point that became the benchmark for everyone.
The trap springs when the music stops. If people suddenly decide that the painting is not a masterpiece, there isn’t a steady market to gently adjust to that new sentiment. Prices don’t fall gradually; they can drop sharply. A new, official “value” is only established when a desperate owner is forced to sell to the last remaining buyer, resulting in a significantly lower price that then sets a shocking new benchmark for the entire neighborhood.
Illiquidity, the difficulty of quickly buying or selling a home, provides a protective barrier against the daily price fluctuations seen in the stock market during a rise. However, it can trap owners when sentiment changes; the first sale can reset perceived values for everyone overnight.
In short, illiquidity allows you to ignore reality until the day you need to buy or sell a home.
The Cultural Anchor
Property has evolved from simply being a home into a primary vehicle for household wealth and identity. This emotional and financial connection intensifies the psychological cycle, making the fear of missing out (FOMO) more powerful than the fear of overpaying.
Counterpoints and Complexity
It's too simplistic to paint all realtors as villains and all buyers as naïve. Many agents provide diligent, client-focused service. The structural issue lies in aligned incentives within a super-cycle. Furthermore, several fundamental demand drivers have played a role: rock-bottom mortgage rates, record immigration, and constrained supply in major urban areas.
Consider the process of determining the real price of a used car. Typically, you would check its history, examine the engine, compare it to similar cars, and assess what you can afford. This is what true "price discovery" entails—figuring out what something is genuinely worth based on factual information.
Now, imagine a scenario where a hype cycle disrupts the used car market. A rumor spreads that cars are about to become extremely scarce. Panic ensues, and everyone rushes to buy any car available. As people begin bidding against one another, prices double, and suddenly, it seems that this is the new norm for car prices. In this chaotic environment, everyone starts to believe, "This is just what cars cost now."
What's been corrupted?
The process of determining a property’s fundamental value has become distorted. It's no longer based on the home's condition or your budget; instead, it relies on panic, fear of missing out, and the chaotic behavior of others. The "market price" no longer reflects true economic value or the value it creates for the owner; it has shifted to being driven by psychological factors.
How does this relate to housing?
The "fundamentals" refer to key facts, such as typical mortgage rates, normal price growth linked to wages, and the basic idea that house prices should correlate with people's incomes.
On the other hand, "cyclical psychology" (the hype) distorted people's perception of these facts.
Individuals began to see historically low interest rates as "normal" and adjusted their budgets accordingly. They viewed unsustainable, double-digit price increases each year as a guaranteed trend rather than a temporary situation.
This led to a disconnect between income and housing prices. People stopped asking, "How can today’s and future generations afford these prices based on their salaries?" Instead, they began to ask, "How can I stretch my budget to buy anything, since it will be worth more next year?"
What is "malinvestment"?
Malinvestment happens when individuals take on high risks without receiving adequate compensation. It refers to situations where people invest in poor ventures that only appeared promising as long as the hype continued. Examples of malinvestment include:
New presale condos, where the developer shifts project risks onto the buyer, which are priced higher than recently completed resale condos.
An old house containing asbestos that is bought without an inspection.
A rental property whose carrying costs far exceed any potential rental income.
At the time, these investments didn’t seem like bad bets because distorted market psychology made them appear to be sure wins. The market wasn’t fake; people genuinely paid those prices.
However, those prices were determined by collective panic and greed rather than rational assessments. Once investors and owners face the harsh reality of normalized interest rates, high operating costs, and stagnant price gains, the truth becomes evident, and all those misguided investments, referred to as "malinvestment", are revealed for what they truly are.
The Tide Recedes
The landscape of Canadian real estate has shifted as the era of ultra-low interest rates and unwavering optimism comes to an end. The immediate factor is the increase in borrowing costs, but a more significant change is the shift in the psychological mindset. People are becoming more risk-averse.
Discovery Phase: As the market cools and sales decline, property inspections are making a comeback. Issues such as deferred maintenance, poor quality renovations, and shortcuts taken by developers will now be priced into an offer, rather than overlooked. Consequently, we can expect an increase in litigation regarding undisclosed defects.
The Bezzle Shrinks: Over-use of presale re-assignments, questionable appraisals from the boom period, and misleading marketing claims are being revealed. What was once considered profit (the "bezzle") is now turning into losses.
Systematic, Not Systemic: We are not witnessing a widespread collapse of the property market; rather, we are experiencing a systematic realignment of behaviour. The financial losses will primarily affect individual households and investors who, at the height of the market cycle, abandoned prudent financial standards and due diligence. This is a recalibration toward a more balanced market. Some real estate agents will find their jobs much more challenging under these normal market conditions. Additionally, some baby boomers who were waiting for higher prices to sell their homes and downsize might find that their greed led them to miss out on the best market conditions they have experienced in their lifetime.
Where to Next?
The alarm bell for Canada’s property market is not just one economic factor, but rather a collective mindset. The shift from "this is easy money" to "help get me out at any price" is a familiar pattern in finance.
Industry players, influenced by market-cycle incentives, transferred significant risk to buyers who, during a booming market, willingly neglected their due diligence. The upcoming decade will distinguish actual intrinsic value from temporary illusions of wealth. It will reveal that the worst purchases were often made during the most favourable conditions and that the true cost of a frenzied market extends beyond mere dollars; it includes the resilience that was overlooked in the rush to fit in.
Condo mortgage payment as % of median income
Condo apartment prices in Vancouver, Victoria, Hamilton, and Toronto have considerable room to fall before first-time buyers can afford to purchase, which would help stabilize prices.
