Housing crash led to $135 million in lost wealth for Toronto homeowners last year

By: Jessica Mach on April 12, 2018

It’s official: Toronto’s housing bubble has finally burst. This is the case, at least, for the city’s detached home market, where owners lost a collective $135 million within the span of four months last year when detached home prices suddenly dropped drastically.

The loss was shouldered by at least 988 households in the GTA between March and July of 2017, according to a new analysis by real estate brokerage Realosophy. Nearly 88% of those properties had been sold to buyers who then found themselves unable to close their transactions after property values fell by 18%.

When property values fall between the time a buyer’s offer is accepted and the buyer can close, the buyer can find themselves unable to secure a mortgage loan to back up their offer, since lenders match the size of the loan to the price a property is appraised for. The buyer may then have to rescind their offer, which can result in hefty penalties — including getting sued by the seller.

Also surprising is that 12% of sales were made by house flippers. Those properties were resold for an average of $107,325 less than what their owners had bought them for less than a year earlier. (Hard to feel sorry for this group, though.)

A price drop of this size, and within a time frame as small as four months, is a big deal.

In major U.S. cities, including New York City, Los Angeles, Washington, D.C., San Francisco, San Diego, Phoenix, Las Vegas, and Miami, an 18% drop in housing prices has historically taken an average of 20 months to occur. Miami has seen the fastest decline in prices, but it happened over the course of 12 months.

In 2015, housing prices in the GTA began climbing to record heights. More people were buying, too: by 2016, sales were up 29% above the GTA’s ten-year trend. Experts have suggested a number of factors that were pushing up both demand and prices, but Realosophy’s analysis focused on only three: the GTA’s high population growth, a subsequent decrease in housing stock, and the psychology of missing out.

Many people were eager to take advantage of the city’s high prices by investing. Others saw the city’s ever-climbing prices, and did not want to wait to secure a home for themselves, since they believed that prices could be even higher in the future. John Pasalis, president of Realosophy, noted seeing a rise in parents who were purchasing homes for their elementary school-aged children, due to fear that their children would not be able to afford a home otherwise.

But, the bubble could only get so big. Prices began to fall in the lead up to, and the aftermath of, Ontario’s foreign buyer’s tax that was introduced in 2017.

It seems like most of the wreckage has been done, however. Prices declined rapidly in the four months after the peak, and have been moving sideways since then. Still, it’s clear that quite a few people lost a lot of money in the real estate bloodbath in 2017.

Now, the question is whether something similar is about to happen in condos. Condo prices have run up rapidly in the past year, and this spring has been especially hot. However, Realosophy has said that the condo market is harder to predict, as many have been calling for a crash in Toronto condo prices for nearly a decade.