50 Years of Real Estate Prices in Toronto

Housing BubbleBack in 1966, the Vietnam War was raging, the Star Trek and Batman series aired for the first time on TV, and house prices in Toronto averaged just over $21,000.

Over the next 50 years, house prices in the Greater Toronto Area (not adjusted for inflation) increased exponentially, by a factor of 40, and could reach $900,000 this year. As the chart below shows, the trend line has been remarkably smooth, with only one ‘aberration’ during the bubble years in the late 1980′s. From 1985 through 1989, prices increased by 250%. When the bubble finally burst, there was no warning, nor any obvious triggering event, it simply stopped, as if someone threw a switch. Buyers stopped buying, inventory rose sharply, and prices stopped increasing. Prices fell by 28% over the next 7 years and so the boom and bust cycle  lasted a total of 11 years. Prices didn’t return to their 1989 level until 2002.

What’s especially interesting is that if the trend line from 1966 until 1985 is simply projected to 1996, it continues smoothly upward from there. It’s as if the market was infected with some sort of temporary insanity from 1985-1996, after which reason returned and prices continued to move upward as if the bubble never happened.

After prices bottomed out in 1996, they rose inexorably every year since. With the exception of 2008, when the Financial Crisis caused a brief pause (but no decline) in our market, prices consistently rose by 5-10% per year… until last year, when they increased by 17%. This was a massive deviation from the 19 year trend, and it seems to be accelerating even further this year. Clearly something has changed, but as to what that ‘something’ is, there is no clear consensus. Mortgage rates are extremely low, but they have been that way for several years and, if anything are now slowly increasing. Immigration is boosting the GTA population but, again, that is not a recent trend. There are rumours of increasing foreign investment, but a recent survey suggests that this amounts to only 5% or so of GTA sales. So what is going on?

Toronto Prices 1996-2017

In my view there are two reasons for the recent acceleration in prices. First, the inventory of homes for sale has been steadily dropping over the past few years. In part that is because of limited supply of new housing in the GTA outside the City of Toronto, largely driven by local and regional housing policies. More important, though, the dynamics of the market tend to make falling inventory a self-reinforcing trend. This is because the major source of inventory is move-up buyers. As the supply of homes for sale contracts, it gets harder to find a home to buy, and easier to sell, so move-up buyers increasingly choose to buy first and only offer their homes for sale after they find something. After all, their present home is virtually guaranteed to sell quickly, likely in a bidding war, while it could take many months, even a year or more, to find their next home. As a result, move-up buyers have fewer and fewer homes to choose from, since the homes they might buy are held off the market until those sellers, in turn, are able to buy — and this leads to a self-reinforcing downward inventory spiral.

The second and, I think, even bigger reason is purely psychological: the frenzy in bidding wars and price escalation has tended to feed on itself, creating the self-reinforcing expectation that one had better buy now, as it’s only going to get worse. In other words, prices keep rising faster and faster because… prices keep rising faster and faster.

Back in the late 1980′s, prices rose 20% or more each year for four years before the bubble finally burst, so maybe the present trend will continue for another year, or two, or three, or even more. It will continue… until it doesn’t. Both the timing and the nature of the triggering event that will end the boom are highly unpredictable. In the meantime, if you are a seller, enjoy the ride!