Understanding the Asymmetric Price Movement in the Toronto Real Estate Market

In real estate, prices always fluctuate in cycles, but the long-term trend is consistently upward. This is a well-known phenomenon that many of us often discuss. Today, however, we’re diving deep into another fascinating trend: the asymmetry in how housing prices rise quickly but tend to fall much more slowly. Have you noticed this pattern too?

In this blog post, I’ll share three classic examples from the Toronto housing market that illustrate this phenomenon. This price behavior is not just a coincidence—it’s rooted in economic resilience, psychological factors, market structure, and government interventions. By analyzing these factors in depth, you’ll be better equipped to make informed decisions as a buyer or seller. Stick around until the end for valuable insights that could save you money.

The Asymmetric Price Movement: What Is It?

Real estate prices in Toronto, like in many markets, can surge rapidly but tend to decline more gradually. This asymmetry in price movement is a well-documented phenomenon that has occurred multiple times over the past few decades. Let’s explore three major instances that showcase this trend.

1. The 2008 Financial Crisis

Leading up to the 2008 financial crisis, Toronto’s housing market experienced steady growth. Between 2000 and 2007, the average home price in the city increased by approximately 40%, fueled by a strong economy and rising demand. Concerns about a housing bubble began to emerge, so when the global financial crisis hit in 2008, many expected a sharp drop in Toronto’s housing prices.

Key Points:

• Despite a nearly 40% price increase, the downturn was shallow and short-lived.
• The average home price in Toronto fell by only about 6% in 2008, with a swift recovery beginning in 2009 due to low interest rates and government stimulus measures.

2. The 2017 Housing Market Surge

In early 2017, the Toronto housing market saw a dramatic surge in prices, particularly in the detached home segment. Prices in the Greater Toronto Area (GTA) skyrocketed by a staggering 30% within just one year, driven by extremely low interest rates and strong demand.

Key Points:

• The market peaked in April 2017, with the average home price in Toronto reaching around $920,000.
• The Ontario government’s 15% non-resident speculation tax cooled the market, leading to a 12-15% decline over two to three years. This highlights the asymmetric price movement: a 30% rise in one year, followed by a slower decline.

3. The COVID-19 Housing Boom

From mid-2020 to early 2022, the average home price in Toronto surged by over 50%, driven by historically low interest rates, increased demand for larger homes due to remote work, and both local and international buyers.

Key Points:

• As interest rates rose, the market cooled, with average home prices falling by around 10-15% from the 2022 peak.
• Despite the downturn, the decline was gradual compared to the rapid rise during the pandemic.

Why Do Housing Prices Fall More Slowly Than They Rise?

1. Economic Conditions and Market Dynamics

Housing markets often boom with strong economic fundamentals: high demand, limited supply, low interest rates, and positive economic conditions. These factors create a resilient market that can withstand shocks. During a boom, buyers driven by the fear of missing out (FOMO) can push prices up quickly. When the market turns, these same fundamentals act as a buffer against rapid decline, creating a “sticky” market where prices fall gradually.

2. Psychological Factors

Psychology plays a significant role in why housing prices tend to drop more slowly. Sellers often anchor their expectations to the peak prices their properties once commanded, making them reluctant to sell at lower prices, even when market conditions suggest a decrease is warranted. This is tied to the principle of loss aversion, where people feel the pain of losing money more acutely than the joy of gaining it.

3. Structural Factors

Real estate transactions involve significant costs—commissions, legal fees, closing costs, and taxes—making it less attractive for sellers to lower prices quickly. Additionally, it takes time to find a buyer, especially during periods of economic uncertainty, slowing down the rate at which prices can adjust downward.

4. Government Interventions

Government actions and policies can also help slow down housing price declines. In tough economic times, the Bank of Canada may lower interest rates or roll out programs to boost housing demand, such as incentives for first-time buyers or mortgage relief, leading to a more gradual market adjustment rather than a significant crash.

What Does This Mean for Buyers and Sellers?

For Sellers: If you need to sell, be realistic about current market conditions. It’s important to let go of peak price expectations and set a price that reflects the current market. If you can afford to wait, holding onto your property for a few more years might be a better strategy than selling during a downturn.

For Buyers: While it may be tempting to wait for a significant price drop, keep in mind that prices tend to decline slowly. If you find a property that meets your needs and fits your budget, it might be worth acting sooner rather than holding out for a discount that may not materialize.

I hope you found this analysis insightful. If you learned something new today, consider subscribing and hitting the bell to stay updated on future episodes.

Understanding these market dynamics can significantly impact your real estate decisions, so stay informed and make the most of the opportunities available.