Looking to the past to determine the future

by Justin da Rosa09 Jan 2017
Canada’s real estate has experienced a severe crash before – but could it again? One report considers it.

Toronto real estate saw unprecedented growth in the late 1980s; interest rates dropped and a lack of supply pushed buyers and speculative investors to purchase in fear of missing out should homeownership become out of reach.

“Between 1986 and 1989, the average price of a Toronto home grew between 20-30% annually —and it didn’t take long for developers to take note,” Grant Thornton said in its recently released report, History lesson: Canadian real estate buyers and developers can learn from the past. “Motivated by an exceptional increase in demand, developers seized the moment to increase supply.”

We all know what happened next.

Inflation increased to 12.47% by the end of 1989 and homeowners were no longer able to afford the homes they had purchased.

And then in 1990 Canada fell into a recession; the average Toronto home value fell below $200,000 by 1996 after climbing to $273,698 in 1989.

According to Grant Thornton, the collapse was due to three factors; Canada’s lack of a forward-thinking policy framework, investor and developer speculation, and the recession.

But is a similar downturn in the cards?

After all, record-low rates are enticing buyers to scamper to purchase homes seem to be on a never-ending skyward trajectory.

The accounting firm set out to answer that question.

“When we look at the current situation a bit further, it becomes quite apparent that we’ve learned some lessons—in at least a couple of areas,” the report said.

A monetary policy framework and various lending rule changes have been put in place curb speculation and ensure prudent lending. 

Still, the possibility exists.

“When we look at the current situation a bit further, it becomes quite apparent that we’ve learned some lessons—in at least a couple of areas. For one, runaway inflation no longer appears to be a factor, thanks to the Bank of Canada’s aforementioned monetary policy,” the report said. “Second, measures have been put in place to curb speculation.

“Before starting construction on a development, 60% or more of the units must be sold if a developer hopes to get financing from a bank,” it continued. “However, the risk of speculation isn’t completely eliminated as there appears to be no shortage of non-traditional lenders willing to lend money nowadays.”


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COMMENTS

  • by 1/10/2017 5:36:54 PM

    I cant find this Grant Thornton report anywhere online. It would be great if you guys could offer links to the articles you pull your articles from, and the source reports where applicable.

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