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History Repeating Itself? Toronto's Long Record Of Housing Busts

No, house prices don't just go up forever.

So 2016 turned out to be yet another record-breaking year for Canada’s housing markets, particularly for Toronto, where sales rose to an all-time high and the average house price jumped by $122,000 in a single year, to around $730,000.

That’s about as unsustainable as a housing market can get. Yet at this point, the experts who've long predicted a crash -- and who should now be shouting louder than ever -- have gone quiet.

The bubble-mongers had been making dire predictions for Toronto and other parts of the country since around 2010, when price growth began accelerating. But being proven wrong year after year tends to take the wind out of your sails.

In the case of the bubble-mongers, though, they may not have been wrong. They may have simply underestimated just how long this boom would go on. If history is any indicator, when the boom busts out, Toronto will be in for a long decline. It's just a question of when.

Realtor Marisha Robinsky of Bosley Real Estate published a chart last week showing Toronto house prices, adjusted for inflation. It turns out the Toronto housing market is a repeating pattern of spiking price growth, followed by prolonged periods of decline and stagnation.

Take a look at Robinsky’s chart, and decide for yourself what you think will happen next with house prices in Canada’s largest city.

There are two major takeaways from this chart:

  • In the long run, Toronto house prices have risen consistently.
  • In the shorter run, house prices can fall for years, even a decade.

It's clear Toronto's housing market has a long history of booms and busts. But these aren't Florida- or Nevada-style housing bubbles, which inflate quickly and pop suddenly. Toronto's house-price cycles are longer and slower, and when the bust comes, it lasts for a long time.

Toronto house prices, adjusted for inflation, have fallen for 23 of the last 63 years, or about a third of the time.

In other words, if you get a 25-year mortgage in Toronto today, the odds are good you will spend some eight or nine of those years watching prices fall.

Prices dropped by about a quarter during a five-year decline in the early 1960s; they fell about 14 per cent during a decade-long slump from the 70s to the 80s; and they dropped a sharp 39 per cent from 1989 to 1995.

In that latest bust, inflation-adjusted house prices didn’t return to their 1989 peak until 2010. Someone who bought in 1989 would have to have sold their home after 2010 to see any real profit on it.

Should you panic? Should you stay out of the market or sell out of the market today? Not necessarily, Robinsky says.

“If you find a place you really feel you like, and you plan to be there for 10 years or more, then it doesn’t matter,” she said — in the long run, prices will return to growth.

But if you’re buying to flip the house in a few years, exercise caution.

Robinsky isn’t willing to speculate on whether Toronto’s housing boom is about to end, or whether it still has legs. She notes that, percentage-wise, the house price spike in Toronto over the past few years isn't nearly as big as the ones before the 1974 and 1989 bust-outs.

And one other element is still missing from a Toronto housing bust: A sudden increase in mortgage rates, which has coincided with the city's last two housing slumps. So it's worth noting that mortgage rates are on the rise, albeit slowly.

Robinsky says she “hopes” the market is finally coming to its top, pointing to the city's eroding home affordability, which is now at its worst levels since that previous housing bust.

“It’s just horrible to be on the buyer’s side right now.”

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