In real estate, prices always go up and down in cycles, but the long term trend is always up.
This is one phenomenon that we have always talked about.
Today, we are going to deep dive into another interesting phenomenon.
When housing prices go up, they typically happen very quickly.
But when housing prices come down, they tend to do so at a much slower pace.
Have you noticed that too?
I’m going to share 3 classic examples in the Toronto housing market that illustrate this asymmetric price movement.
In fact, it is a well-documented phenomenon based on economic resilience, psychological factors, market structure and government interventions.
We are going to analyze each of those things in depth.
Understanding them will help you make a better decision as a buyer or seller, make sure you stay till the very end so you grab all the knowledge for free!
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We have seen significant fluctuations in the Toronto housing market over the past couple decades.
Let’s take a look at 3 major instances where we saw dramatic price increases and a market crash.
#1 The 2008 Financial Crisis
In the years leading up to the 2008 financial crisis, Toronto’s housing market saw steady growth.
Between 2000 and 2007, the average home price in the city increased by around 40% fueled by a strong economy and increasing demand.
People were starting to talk about a housing bubble.
So when the global financial crisis hit in 2008, many expected a sharp drop in Toronto’s housing prices.
Surprisingly, the decline was very modest compared to other global cities in the world.
The average home price in Toronto only dropped around 6% in 2008.
And the recovery started very quickly in 2009 due to low-interest rates and government stimulus measures to get us out of recession.
The Great Recession only caused a shallow and short-lived market crash even though prices went up almost 40% in the few years preceding the crisis.
#2 The 2017 Housing Market
In early 2017, the Toronto housing market experienced a dramatic surge in prices, particularly in the detached home segment.
Prices in the GTA increased by a whopping 30% within just one year.
Interest rate was below 1% back then and demand was very strong.
The buying frenzy peaked in April 2017, with the average home price in Toronto reaching around $920,000.
That was when the Ontario government introduced the 15% non-resident speculation tax.
It did crash the market.
By the end of 2017, prices had decreased by about 12% from the peak and the decline continued at a slower pace into 2018 and 2019.
This example showcases the asymmetric price phenomenon.
Up 30% in one year, down only 12 to 15% in 2 to 3 years.
#3 The Covid Housing Boom
From mid-2020 to early 2022, the average home price in Toronto surged by over 50%, driven by historically low interest rates, a shift towards larger homes due to remote work and increased demand from both local and international buyers.
Then of course, we all know what happened.
The rate hikes came in to kill the market.
Over a 2 year period, the average home price in Toronto fell by around 10 to 15% from the peak in 2022.
This drop was far more gradual compared to the rapid rise during the pandemic.
We are technically still in the declining phase right now.
Inventories are starting to pile up, especially in the condo market, but prices are still holding on tight.
You see, when housing prices decline, they tend to do so at a much slower pace than when they increase.
And there are 4 very logical factors that support this phenomenon.
#1 Economic Conditions and Market Dynamics
When the housing market starts to boom, there are always 4 economic fundamentals to support price increases.
Strong demand, limited supply, low interest rates and positive economic conditions.
You see, the market becomes resilient because of these basic fundamentals.
During a market boom, buyers are often driven by the fear of missing out, which can push prices up very quickly.
Now when the market turns, the 4 basic fundamentals are there to act as a buffer against a rapid decline.
Homeowners are less likely to sell at a loss, especially if they have a low mortgage rate locked in or they believe the down time is temporary.
The resistance to lowering prices creates a sticky market where prices decline gradually rather than plummeting.
#2 Psychological Factors
When it comes to why housing prices tend to drop more slowly, psychology plays a big part.
Sellers are often stuck on the peak prices that their properties once had and this mindset makes them hold out.
They refuse to sell at a lower price even when the market conditions clearly suggest a lower price is justified.
It is not just about numbers, there’s also emotional connection to their homes and a hope that the market will bounce back.
Economists call this the “loss aversion” principle.
It means people feel the pain of losing money more strongly than the joy of gaining it, very true, isn’t it?
This makes sellers extra cautious about dropping their asking prices.
Instead of big price cuts, they tend to make small, gradual reductions.
That’s exactly why you see prices falling at a much slower pace.
#3 Structural Factors
Real estate is not meant for frequent buying and selling.
There are transaction costs involved, such as commissions, legal fees, closing costs, taxes.
They make it less attractive for sellers to lower their prices quickly because doing so could result in a net loss after all the expenses are factored in.
Also, it takes time to find a buyer.
Especially during periods of economic uncertainty, buyers are more cautious and it takes longer to sell.
This lag in transaction time slows down how fast prices can adjust downward, making the decline more gradual.
#4 Government Interventions
Government actions and policies can definitely help slow down housing price declines.
In tough economic times, the Bank of Canada would lower the interest rate to stimulate economic activities.
The government may roll out programs to boost housing demand, like incentives for first-time buyers or mortgage relief.
These moves often lead to a more gradual market adjustment rather than a significant market crash.
Now that you understand the underlying reasons why housing prices rise quickly but tend to fall much more slowly, how does that change your mindset as a seller or buyer?
If you are a seller and you must sell, you need to be realistic and understand the market price.
Delete those peak prices from your mind.
If you have the choice of holding on to your property, I definitely recommend holding on to it for a couple more years.
Don’t sell at the toughest time if you don’t have to.
If you are looking to buy, it is probably tempting to wait for that significant drop.
Keep in mind the phenomenon we talked about today.
If you find a property that meets your needs and fits your budget, it might be worth acting sooner rather than holding out for that huge discount that may not come.
I hope you find this episode interesting. If you learn something new today, make sure you subscribe.
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