Okay, Torontonians (and Greater-Golden-Horseshoeians), we need to pinch ourselves. This dizzying dream of a housing boom – or nightmare, if you're priced out of the market – is destined to end. History, and gravity, and a healthy cross-section of economic experts say so.
The key question, then, is how far prices will come down once the hot air goes out of the balloon. The answer may lie in just how much longer Toronto's market remains in the stratosphere.
Toronto-Dominion Bank economist Diana Petramala recently examined the price trends in numerous local and provincial/state housing booms in Canada and the United States going back to the early 1980s, tracing them through the dramatic climb and the subsequent down slope. What she concluded was that while real estate booms of the scale of Toronto's current one are almost invariably followed by downturns, the biggest price surges didn't necessarily result in the hardest falls.
More important than the scale of the climb was its duration. Longer stretches of real estate excess tended to be followed by both deeper and longer slumps.
"The longer they last, the more time there is for financial pressures to build," Ms. Petramala said in an interview.
For Toronto's current price spike, that's good news, at least so far. The scale of the price increases has been relatively large. But prices have not been surging substantially above the market's normal range of growth for very long – just 15 months, Ms. Petramala calculates. While there is a pretty wide range of experiences in the historical data, TD's analysis suggests that booms of about this duration often lead to corrections of less than 10 per cent.
As Gluskin Sheff chief economist David Rosenberg recently noted, when average prices in the Greater Toronto Area are appreciating at a 30-per-cent annual rate, even a dramatic 30-per-cent downturn will only take us back to where we were a year ago – which is to say, to valuations that were considered quite healthy. Nevertheless, that kind of a fall would likely rattle consumer confidence in a decidedly unpleasant way.
But a more modest pullback of less than half that amount could unlock demand from prospective buyers who have been scared off by the price spike, and convince some prospective sellers to put their properties on the market rather than sit on them in hopes of still higher payoffs to come. That would quickly restore some normalcy to the market.
This is the coveted "soft landing" that we hear about. But anyone who has been around long enough to witness an asset bubble or two knows that a true soft landing is much easier said than done. When you start hearing a lot wishful thinking about soft landings, you might want brace for impact.
Toronto witnessed its own hard landing when a housing bubble of the late 1980s popped. Average prices not only tumbled close to 30 per cent, but the slump lasted nearly five years – a time frame that can gut a housing industry. But that bust was preceded by a boom that had lasted four years – which, TD's analysis suggests, is the kind of time frame from which long, hard falls are all but inevitable.
But it's worth considering that this current 15-month spike represents only the extreme of a much longer period of strong price gains in the Toronto market. Even before this surge, prices had risen close to 30 per cent over the previous three years. In other words, the market came into this 2016-2017 price spike at already elevated levels.
At the same time, Canadian household debt loads – as measured by debt as a percentage of disposable income – have been persistently north of 160 per cent, unprecedented heights, for the past five years. While Statistics Canada doesn't break out data by province or city, there's little doubt the Greater Toronto region's booming housing prices have been a significant contributor to that. The surge in the national debt-to-income ratio over the past year or so, to a record 167 per cent at the end of 2016, more or less parallels the region's home-price spike.
It strongly suggests that already high debt burdens in the Toronto area have become acute over the past year, and thus at increased risk in a downturn. The vulnerability of households to a price slump has both spread and grown – the kind of thing that has the potential to both magnify and accelerate price declines. These are the sorts of amplified financial pressures that Ms. Petramala alludes to in longer-running housing booms.
On the other hand, some of the worst slumps in TD's historical analysis came in the U.S. housing meltdown and financial crisis nearly a decade ago. There were a lot of extenuating circumstances at play at that time, including crucial weaknesses in the system for financing home buyers, resulting in some epic price drops in some regions. Many of these factors are not at play in Toronto's current mark-up.
Nevertheless, history suggests that the longer Toronto's boom continues, the more the risks of a hard fall will build. But if the surge runs its course sooner rather than later, the pain may be both bearable and short-lived.
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David Parkinson