Real estate agent Paula Minuti knew the housing market had reached a turning point. The problem was her clients refused to accept it. In May 2017, Minuti listed her clients’ home in York Region, a collection of suburbs just north of Toronto. Just a few months earlier, homes in the area were selling in a couple of days for tens of thousands of dollars—or more—over the asking price. Desperate buyers wanted into the market at any price; sellers were ready to take advantage. But this house had sat on the market for eight whole days without any offers. Now a bid had ﬁnally arrived, just shy of the listing price.
Minuti urged her clients to accept it, pointing out that negotiating power in the market was shifting to the buyers. Her clients refused, sending it back with a request for an additional $45,000. Minuti walked the counter-offer to the buyer’s agent, who was waiting outside while his clients sat in their car. The agent did a double take and went to the car to inform his clients. They started the engine and sped away in a fury, leaving their agent dumbfounded at the curb. “They were pissed,” Minuti says. No amount of pleading over the next few days could bring them back. The house sat on the market for two more weeks before another offer came in. It was $15,000 less than the previous one. This time, Minuti’s clients took it.
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This is the new reality in many parts of Ontario. After years of booming prices and a few months of complete insanity, the housing market in many cities is falling back to earth. In January, home sales in Canada tumbled 14.5 per cent compared to the month before, the biggest single-month decline in nearly a decade. The drop was driven largely by the Greater Toronto Area (GTA), where home sales fell 26.6 per cent, a plunge not seen since 1989. No part of the GTA has been hit harder than York Region. Up until 2017, York’s nine municipalities had seen the biggest price surge in the country. But the average home price in Aurora, Markham and Vaughan has plummeted more than 30 per cent since last April, whereas sales fell more than 60 per cent. Prices in Richmond Hill, meanwhile, have dropped a whopping 43 per cent from the peak. The experience of York is a microcosm of what a wider housing crash in Canada might look like. It illustrates an obvious truth that many Canadians have either forgotten or never had to consider: home prices can and do fall, hard.
Nationwide, the last real shock to house prices came at the start of the recession in 2008. The Teranet-National Bank House Price Index, which tracks prices in 11 major Canadian cities, peaked in August 2008 and fell 8.5 per cent over the following eight months. (The index strips out much of the volatility seen in local home prices, so the percentage changes do not appear as large.) The market bounced back just as quickly. In December 2009, the index surpassed its previous high. The rebound was fuelled by the Bank of Canada’s decision to slash interest rates and a federal government stimulus package designed to shore up conﬁdence and encourage consumer spending. The index has climbed to new highs since then, up 63 per cent.
There are exceptions, though. Calgary hit a peak in 2007 and steadily dropped for the next two years. The average home price took six years to reach its previous high. Prices aren’t much higher today, in fact. The market has stagnated since 2014. Calgary’s housing market is heavily entwined with the price of oil, but, like York, it nevertheless serves as a reminder of what can happen.
To a generation of GTA homeowners, the notion that prices can fall and take years to recover might seem bizarre. But they needn’t look far for a case study. Toronto’s housing market experienced a severe crash in 1989, brought on by a combination of overbuilding, double-digit interest rates and rampant speculation. A recession the following year didn’t help. Data from the UBC Centre for Urban Economics and Real Estate found the market crashed by more than 40 per cent in the years following 1989. Home prices didn’t recover until 2007. Indeed, the 1990s were a stagnant time for Toronto real estate.
But as interest rates fell in recent years, the Toronto housing market skyrocketed. In recent years, no place beneﬁted more than York, where double-digit price gains were not unusual. The region’s popularity grew as people who had been priced out of downtown Toronto looked north to the suburbs. York experienced job growth and humming economies in many of its municipalities, helping support the market.
More controversial factors were at play, too. Attempts by the Ontario government last year to quantify non-resident purchases revealed York as the most popular location for international buyers. Between late April and May, 9.1 per cent of transactions involved foreign buyers, compared to 7.2 per cent in Toronto.
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“For ﬁve years, they were basically our bread and butter,” says Sylvia Morris, a real estate agent who specializes in Unionville, an area of Markham. Foreign buyers, typically from China, would purchase four or ﬁve houses at a time. “This time last year, I’d put a property on the market and within two or three days, I’d have 10 offers on it,” she says. Morris often participated in transactions where buyers never even visited the property; their agents sent video footage instead. Minuti saw countless local clients repeatedly shut out of bidding wars. “The offers I would get would just blow everybody out of the water,” she says. “I’m talking $150,000 or more over asking.”
Domestic investors and speculators could be just as aggressive, though. A study conducted by Realosophy Realty, a brokerage in Toronto, investigated what percentage of homes sold in 2016 were later listed for rent on the Multiple Listing Service. The study revealed that the top four municipalities for investors in the GTA were in York Region. In Newmarket, 20.6 per cent of home sales were purchased as investment properties. Later this year, the ﬁrm will publish another study looking at the ﬁrst quarter of 2017. “The stats are even crazier,” says Realosophy president John Pasalis. “It was just off the charts how many people were buying investment properties.”
Investors flocked to York for the same reason as ﬁrst-time buyers: houses were often more affordable than those downtown. Getting caught in the frenzy caused problems for aspiring landlords, Pasalis notes, as prices escalated and rental income no longer covered the carrying costs. Last year, 95 per cent of all investment properties purchased in 2016 were losing money each month, Realosophy estimated. “When you see people buying investment properties where they’re losing $2,500 a month, it tells you people have this belief that prices will just keep going up forever,” Pasalis says.
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The notion the market could only move in one direction was dispelled by the Ontario government’s Fair Housing Plan in April 2017, which imposed a 15 per cent non-resident tax on homes sold across the Greater Golden Horseshoe, an area that stretches from Waterloo to Peterborough. More than anything else, the plan changed the psychology of the real estate market, cutting through the speculative mentality that was causing prices to rise more than 30 per cent each month.
If the declining prices in York Region are a crash, it’s one that isn’t causing widespread economic chaos in the region. Market players say it’s more of a return to normal after a period of craziness. (For example, home appraisers are actually setting foot inside properties again. Last year, some would just drive through the neighbourhood to conduct an appraisal, if at all.) Suzanna Maya, an agent in York Region, worked through the crash in 1989 and is not concerned about a similar scenario playing out today. “Everything is so much better now than it was back then,” she says. Ontario’s economy is still strong and unemployment is low. People are not losing their jobs, defaulting on mortgages or walking away from their homes.
Still, agents are conducting drastically fewer transactions. There aren’t as many listings available today, and homes that are on the market take longer to sell—38 days compared to nine in April 2017. Minuti held open houses last fall where not a single person showed up. (Earlier in the year, she’d have to bring two colleagues to work crowd control.) “It got to the point where we’d reach out to other agents and ask if they’re getting any visitors on their listings. Because you’re wondering, ‘Is it just my listing?’ ” She’s not alone. “We’re not totally not busy,” says agent Dennis Chan. But he is spending a lot more time catching up on ofﬁce paperwork these days. “I’m just getting my ducks in a row and getting prepared for when the trends go back up,” he says.
Even though the turn in the market hasn’t been calamitous, there is still fallout. Some buyers who purchased near the peak couldn’t close their deals when lenders pulled ﬁnancing after appraisals came in signiﬁcantly lower than the purchase price. Buyers were left either scrambling to ﬁnd a bridge loan or walking away from the deal with no deposit and the risk of a lawsuit. Speculators got caught, too. John, who asked that his real name not be used, purchased a home in the GTA for $1.3 million in June. An appraisal was conducted soon after. “It came back short. Very short,” he says. “I had a small heart attack.”
He borrowed $300,000 from a private lender at nine per cent interest under a one-year term, and found tenants rather than flip the property. The rent doesn’t cover the carrying costs, so he’s losing money every month. “I probably got ahead of myself on this one,” John concedes. He hopes to reﬁnance later this summer with an alternative lender at a more bearable interest rate.
There were also families who purchased near the peak and immediately saw their houses fall in value. The primary purpose of a house is, of course, a place to live—not an investment. Still, nobody wants to see the value of their largest asset decrease, especially if they bought it with the belief that they couldn’t lose.
It’s impossible to say how long it will be before prices in the GTA will return to previous highs, but there are a couple of big factors standing in the way of a quick recovery. For one, the Bank of Canada is gradually raising interest rates, which makes borrowing money more expensive. Second, the new mortgage stress test introduced by Canada’s banking regulator this year will force buyers to take out smaller mortgages, buy less expensive houses or delay purchasing entirely—all of which will hamper price gains.
Foreign buyers are unlikely to drive any rebound. Between mid-August and mid-November, international buyers were responsible for just 3.9 per cent of home sales in York Region, according to Ontario government data. Adam Farber, vice-president at private mortgage lender Corwin Mortgage Capital, works with clients from Iran and says they’re looking beyond the 905 area code. “It seems like they’re trying to pull out as much money as possible and put it into the Ontario housing market, and the GTA just isn’t as desirable anymore with this 15 per cent tax.” Farber is seeing more interest in Ottawa and London, Ont., which are not subject to the levy.
Sometimes, it might be better to ignore market prognostications—particularly the overly ebullient ones. At the Toronto Real Estate Wealth Expo, a daylong celebration of housing lust that attracted thousands last year, Daryl King enthusiastically hyped real estate. “It doesn’t matter where the prices are,” King, an agent who works in York, told the crowd. “They’re still going up, and they’re going up rapidly.” Later, he mocked those who warned of a housing bubble. “Don’t listen to people that aren’t doing anything,” he said to cheers. “So buy today, before it’s too late.”
That was March 2017, just before prices started tumbling across the GTA. For anyone hoping to maximize their wealth through real estate, King’s advice seemed ill-timed. Although he doesn’t see it that way. “In a couple of years, it could be back,” he says now of the GTA housing market. Real estate typically works on a seven-year cycle, he says, so those who invested when prices were at an all-time high could still see a return if they’re patient. What’s more, King insists, the market could turn around soon. “I know when the warmer weather comes out, the market is going to pick up tremendously,” he says. “We can’t help it. It’s in our blood.”