Toronto's Housing Market Frenzy: Lessons from the Late '80s Price Surge

Toronto's housing prices skyrocketed by an astonishing 150 percent from 1985 to 1989. Since then, no four-year period has matched this level of price escalation. Recent price gains, particularly from the onset of the pandemic to the first quarter of 2022, were labelled extreme by housing experts. Many attribute the surge to ultra-low interest rates during the early days of the pandemic.

Much has been said about the decline in housing prices since mortgage rates began climbing in early 2022. However, Toronto's housing prices experienced a significant decline only in the early 1990s following a massive economic recession. Nominal housing prices over four years were negative only during the first half of the 1990s and have remained strong over any four years since then.

However, two crucial points warrant consideration. First, the recent price increases pale in comparison to the late 1980s. Second, the earlier price surge occurred despite high mortgage rates.

Numerous factors, many of them demand-driven, can explain the housing price gains in the late 1980s. For instance, baby boomers were entering their peak earning years. However, a more relevant factor was the significant decline in mortgage rates. The conventional five-year mortgage rate plummeted from over 21 percent in 1981 to 10.5 percent in 1987.

The key consideration here is that it is not just the absolute level of mortgage rates but whether they are falling or expected to fall that drives housing price appreciation. If prospective homebuyers expect mortgage rates to decline in the next few months, we may see another (albeit modest) surge in housing prices. The counterargument is that the buyers may stay on the sidelines, waiting for the rates to drop even further.

The downside of waiting longer is that more buyers will compete in the market, which currently has sufficient new listings but will ultimately see increased prices. Variable mortgage rates offer an alternative to those who have found a desirable home but prefer to wait for rates to decline further. Purchasing now with variable mortgage rates can provide the advantage of buying at a lower price and switching to a fixed rate when variable rates appear to have reached their lowest level in the current rate cycle.