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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Canada’s real estate has experienced a severe crash before – but could it again? One report considers it.