Canadian Housing Bubbles: A Cautionary Tale from the Recent Past

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Editor’s Note: Big thanks to Larry Cuozzo for sharing the housing lessons he’s learned over his lifetime.  Check out our new eBook about buying or renting in Canada.  It is completely FREE!

I'm sure many readers of YoungandThrifty.ca have come to the conclusion they will never be able to afford a home like they grew up in.  Housing prices in many urban centres have reached levels never seen before.  Over the past 15 years, single-family detached home prices have tripled in the Toronto area.  The gains have been even greater in Vancouver.

For a young person who wants to buy their first home, the financial roadblocks may seem staggering.  How can anyone afford a home when prices seem to be increasing by double digits every year, while family income growth barely keeps up with inflation?

Before you give up all hope, I'd like to share with you my story of buying my first home.  Although it takes place in the mid- 90's when I was a recent university graduate, I hope you will see how quickly things can change and how difficult it is for anyone to know exactly when that will happen.

Back in the late 1980's, my parents and I were living in Markham, Ontario, a suburb of Toronto.  Much like today, Toronto was in the middle of a strong housing market; prices were going up, mortgage rates were heading lower, and the economy was strong.

Canadian Housing BubblesIf you were around then, you would have heard the exact same arguments you hear today on why buying a house was such a great idea:

“Housing prices always go up”

“They're not making any more land”

“So many immigrants are coming to Toronto, they all have to live somewhere” 

For a while these predictions came true, but suddenly and without anyone seeming to have predicted it, housing prices crashed.  Friends of my family had bought a new 3,000 square foot home in Markham for $650,000 in 1989.  In 1996, the exact same home sold on their street for $397,000, down 39% from the purchase price only seven years earlier.

Today, that same home will sell for around $1.5 million – which sounds impressive. However, if you adjust for inflation over the past 26 years, the real return on that home bought in 1989 is a whopping 0%.  By comparison, the US stock market has returned 6.65% annually after inflation since 1989.

I bought my first home is 1996, not because I had any idea that this was the bottom of the market; I was just at the right place in my life at the right time.  I'd like to think that if I had been in the housing market in the late 1980's, I would have resisted the temptation to listen to the pundits who turned out to be so wrong about housing prices.

Now fast forward to 2016 and things could be different this time. It's impossible to know for sure.  There are always arguments for and against current home prices.  Interest rates are at historic lows and don't seem to be heading higher anytime soon.   Because of that, mortgage payments as a percentage of median family income are still lower than they were in 1989.

So, how are you going to decide if you should or shouldn't buy that first home today.  My advice to you is:

  • Don't be driven by the fear that you need to get into the housing market now or you'll be priced out of the market forever. Forever is a long time and things will change on a dime.
  • Investigate the alternatives to buying and remember there are opportunity costs with any investing decision you make. One advantage I see to investing in stocks today is you can ease into stocks if you believe the stock market is overvalued using dollar cost averaging.  You can't do that with real estate where it's all or nothing.
  • As hard as this is to do, try to visualize your life 10 years from now. If, for example, you don't know where your job will be, or you are still single but plan on marrying, now might not be the best time to put down roots.   For certain we know prices are not cheap and the transactions costs for buying and selling real estate are huge.  If, however, your major life decisions are settled and you don't expect major changes, then buying now for personal reasons may not be such a terrible idea.  Just make sure to be as conservative as possible with your purchase and prepare your finances for any shocks that may happen.
  • And finally, if someone insists on giving you their prediction on where housing prices are going, do yourself a favour; cover your ears and hum a song loud enough that you can't hear them.

Larry Cuozzo is a high school department head living in the Greater Toronto Area.  He recently started a personal finance blog at InvestingBS.com where he hopes to help his readers become D.I.Y. investors and gain from the wisdom he's accumulated over the past 23 years of working and investing.

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7 Comments

  1. DA on February 21, 2016 at 7:44 pm

    You are really lucky to buy a home in 1996. The prices in Markham are sky high now. My co-worker made money by selling the primary residence every 5 years. Many people will tell you it is really good to make money. I love to live in a small place because I don’t have to spend a lot of time cleaning. I am on my way to finish up the mortgage ($90,000 left).



  2. Kyle on February 22, 2016 at 8:48 am

    Good for You DA! I can imagine the tax-free profits would really add up for your co-worker.



  3. Amy on February 25, 2016 at 9:41 am

    I certainly have come to the conclusion that I cannot afford a house like the one I grew up in, at least as long as I live in Toronto. I am looking to buy and am concerned about the possible extent of the current housing bubble. I have been frustrated by the fact that it is so difficult to find trustworthy commentary and analysis on the housing market. Almost every article I can find that purports to give knowledgeable discussion of the issue turns out to be written by a realtor, a mortgage broker or the like, invariably pushing everybody to buy right now for whatever it costs. I looked for articles by economists, perhaps analyzing past situations, and I found economists who were employed by these people’s professional organizations. I can’t trust any of these writers.



  4. Kyle on February 25, 2016 at 2:33 pm

    Hey Amy. I feel your pain! For what it’s worth, I think some names I’d look for are Benjamin Tal, Preet Banerjee, and John Robertson. All fit the status of independent experts that I believe you are looking for. Truth be told, the housing market is pretty much straight up irrational by any metric I’ve looked at. The problem is that no one really knows if Canadians will ever become rationale about housing, or what that would even look like. Also, talking about “Canada-wide” housing stats is pretty much useless to my way of thinking because housing prices are very regional.



  5. Amy on February 26, 2016 at 9:04 am

    Thank you so much for recommending some independent experts! I will look into those.



  6. Kyle on February 27, 2016 at 12:33 pm

    No problem Amy. Good luck!



  7. Al on November 25, 2016 at 2:37 pm

    great article 🙂



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