April 26, 2015

Remembering the 1989 Canadian Real Estate Bust

"Between 1985 and 1989 the average price of a house in the GTA increased by 113% in real terms or by $240,992 in today's dollars. Low unemployment of the late 1980s and large inflow of immigrants to the area helped to inflate the bubble. Some critics pointed to the fact that in the early 80s many women were still just entering the workforce and thus doubled the income of households by the mid 80s which further fueled the bubble.

However, one could argue that bubbled was fueled mostly by massive speculative investment. In late 80s everyone thought that the housing prices are going to rise indefinitely and that turned real estate into a compelling investment for everyday Joe. More people jumped into the market hoping to make a fortune causing an artificial increase in demand. Suddenly housing became scarce, which further increased the price. Developers decided to profit on this illusive scarcity by building condos left and right - many of them in downtown Toronto.

During the peak of the bubble the borrowing cost started increasing and the 5 year fixed mortgage reached 12.7%. Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 average price of a house in GTA have declined by 40% adjusted for inflation or $182,625 in today's money. Downtown of Toronto was hit the worst with over 50% decline in value of a home."

Read the full article by Toronto Condo Bubble