Flux Capacitor
Active Member
Why did the market crash in the 80s?
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- Thread starter Flux Capacitor
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Riverdale Rink Rat
Senior Member
It wasn't really the '80s, but '89 - '91, if we're talking Toronto. Short answer is rates went up, followed by crunching recession.
js97
Senior Member
^^ Pretty standard answer. Rates where as high as 18% (imagine carrying 400k mortgage on that) followed by crushing unemployment rates of 10%+
We're close with unemployment rates, interest rates??? well, if there is a war, we'll see interest rates go up a few points...
If you're looking for indications of a real-estate crash.... if the economy tanks and the US goes to war and canadians go histerical on housing confidence... you'll see a crash (it also took 4 years for the market to 'bottom out'.
We're close with unemployment rates, interest rates??? well, if there is a war, we'll see interest rates go up a few points...
If you're looking for indications of a real-estate crash.... if the economy tanks and the US goes to war and canadians go histerical on housing confidence... you'll see a crash (it also took 4 years for the market to 'bottom out'.
CN Tower
Banned
The market crashed because buildings were being developed entirely on spec. Condos and office towers were being financed by lending institutions without significant pre-sales or pre-leasing activitiy. It created an enormous glut of condo and office space that took years to absorb. The victims of that crash were primarily the big lenders but I don't think any large developer walked away from that period without enormous corporate and personal devastation. Today the exposure falls primarily on individual buyers and to some extent the developers although the savvy groups have offset their risk through healthy development fees along the way.
In contrast, today there are no spec office development to speak of and condos are pre-sold to the tune of 70%-plus before a shovel hits the dirt. That's not to suggest that the market cannot correct but there is real recourse to qualified buyers (perhaps that definition is open for discussion) if they elect to walk away from their contractual agreements in addition to meaningful non-refundable deposits that buyers will forfeit.
On top of that while prices today may be high, the pace of price escalation in the late 80's was double-digit annually for several years.
Today's market does not resemble the late 80's market at all although I imagine the 18,000 or so unsold units coming to market does give rise to a certain amount of concern for the development community as a whole as unsold inventory will compete directly with new developments. Logic states that those units will either get absorbed over time or thrown into a direct rental pool that the GTA's steady immigration will also absorb.
The foregoing does not imply that prices are free from correction but merely that the prospect of what would be considered a market crash is very unlikely. I applaud the Finance Minister's attempt to reign in the excess speculative buying through his recent mortgage rule changes. It is a very delicate balance to support the housing industry in general while being cautious of any adverse affects of a runaway market.
In contrast, today there are no spec office development to speak of and condos are pre-sold to the tune of 70%-plus before a shovel hits the dirt. That's not to suggest that the market cannot correct but there is real recourse to qualified buyers (perhaps that definition is open for discussion) if they elect to walk away from their contractual agreements in addition to meaningful non-refundable deposits that buyers will forfeit.
On top of that while prices today may be high, the pace of price escalation in the late 80's was double-digit annually for several years.
Today's market does not resemble the late 80's market at all although I imagine the 18,000 or so unsold units coming to market does give rise to a certain amount of concern for the development community as a whole as unsold inventory will compete directly with new developments. Logic states that those units will either get absorbed over time or thrown into a direct rental pool that the GTA's steady immigration will also absorb.
The foregoing does not imply that prices are free from correction but merely that the prospect of what would be considered a market crash is very unlikely. I applaud the Finance Minister's attempt to reign in the excess speculative buying through his recent mortgage rule changes. It is a very delicate balance to support the housing industry in general while being cautious of any adverse affects of a runaway market.
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Kenny
Active Member
There was a ton of speculative buying back then. People were making millions buying and selling multiple homes. There was massive leveraging going on. It seemed like easy money for a while because prices kept going up at a crazy rate, year after year. But, like most speculative markets, when prices started going down, people started selling in droves. When interest rates are so high, you depended on high capital gains to make back your money. Falling prices scared the bajeezus out of speccers.
cityboy
Active Member
Real estate collapsed because the Bank of Canada governer John Crow raised short term interest rates to bring inflation down to his 2% target. He achieved this eventually but the economy suffered a made in Canada recession at the time (manufacturing took a big hit) and the real estate market for obvious reasons was collateral damage.
I would argue spec building is greater today than in 1990. As an early investor in the projects I purchased, I only put 10% down with no additional payments. I don't think there is too much recourse with foreign buyers or buyers that are fully leveraged.
I would also argue the real price apprection is similar today to the 80's if you factor inflation. CPI numbers in the late 80's were in the high single digits.
I would argue spec building is greater today than in 1990. As an early investor in the projects I purchased, I only put 10% down with no additional payments. I don't think there is too much recourse with foreign buyers or buyers that are fully leveraged.
I would also argue the real price apprection is similar today to the 80's if you factor inflation. CPI numbers in the late 80's were in the high single digits.
flonicky
Senior Member
And in some cases, tried to stay above water and ended up going to jail.
CN Tower
Banned
Your comments don't make sense. There's 100% recourse to buyers. You can't walk away from a purchase and sale contract nor a mortgage. Spec buying may be greater but that's different and shifts risks to individuals as opposed to developers and lenders. There aren't as many foreign buyers as you think- they may be visible minorities but the majority of them, by far, have Canadian residency and citizenship.
Price appreciation DOES NOT REMOTELY COMPARE. It's not something you can argue- it's factual. Inflation may have been high but a loaf of bread wasn't going up 20% a yr in price for 4 yrs.
daveto
Active Member
Yes, for local buyers there is recourse, although practically speaking it is difficult to enforce recourse on foreign buyers
Inflation 1985 to 1989 was indeed under 5%, whereas annual RE increases were a crazy 25% a year. However, if you look at the full RE cycle, the trough to peak price increases (1976 to 1989) net of inflation were similar to our recent trough to peak cycle (1996 to 2012)
ps Here is a chart of the historical BoC interest rates
http://www.bcrealtor.com/d_bkcan.htm
cdr108
Senior Member
it should be noted that starting late 1979 - 1982, BoC interest rates were in the 15-20+% range.
they were progressively reduced to low 7+% by early-1987 and only raised to low 14% by mid-1990.
monetary policy was also responsible for the substantial r/e appreciation.
at 15-20%, it would take $1,250-1,600/m to finance $100K for 25 years amortization;
when rates dropped to 7%, it would only take $700 to finance that same $100K.
so of course, people typically look at the monthly payments.
hence, the original $1,250-1,600 would now suddenly be able to finance upto 2.3x what it did before.
thus prices could jump from $100K to $230+K and not change much in monthly payments within a matter of years (1979-1987).
further appreciation was probably fueled by speculation, until rates were increased back to 14% by mid-1990 (in under 3 years) to quell rapid inflation. now that same $230K @ 14% would require upto 65+% more to finance than @ 7%.
interest rates had to be dropped back down to 3-5% by 1997 before r/e sales got any traction again.
http://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_page1_2_3.pdf
similiarities are occurring again as interest rates have been reduced from 14% in mid-1990 to 1% currently.
with rates having no where to go in the long-term but up, and the historical average north of 5%, we're looking for trouble.
they were progressively reduced to low 7+% by early-1987 and only raised to low 14% by mid-1990.
monetary policy was also responsible for the substantial r/e appreciation.
at 15-20%, it would take $1,250-1,600/m to finance $100K for 25 years amortization;
when rates dropped to 7%, it would only take $700 to finance that same $100K.
so of course, people typically look at the monthly payments.
hence, the original $1,250-1,600 would now suddenly be able to finance upto 2.3x what it did before.
thus prices could jump from $100K to $230+K and not change much in monthly payments within a matter of years (1979-1987).
further appreciation was probably fueled by speculation, until rates were increased back to 14% by mid-1990 (in under 3 years) to quell rapid inflation. now that same $230K @ 14% would require upto 65+% more to finance than @ 7%.
interest rates had to be dropped back down to 3-5% by 1997 before r/e sales got any traction again.
http://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_page1_2_3.pdf
similiarities are occurring again as interest rates have been reduced from 14% in mid-1990 to 1% currently.
with rates having no where to go in the long-term but up, and the historical average north of 5%, we're looking for trouble.
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interested
Senior Member
The other issue is rents.
Rents were less than now but not by much. However, the carrying costs were far higher with mortgage rates of 13- 20%.
So a $200K condo with 10% down had a $180K mortgage. At say 15% the mortgage interest alone was $27,000.
Add taxes, condo fees etc. and investors were in much more severe negative cash flow than they would be today.
If today we assume a 5% mortgage (easily obtainable); the 10% difference from 15% means $18,000 a year. If the house price is double what it was at the peak, it still means a $9,000/year additional mortgage payment alone. After a couple to 3 years of $9K+ negative cash flow over and above the present negative cash flow; you can see why without a market recovery prices just dropped to 1992 after which they cruised along a bottom until 1996.
Rents were less than now but not by much. However, the carrying costs were far higher with mortgage rates of 13- 20%.
So a $200K condo with 10% down had a $180K mortgage. At say 15% the mortgage interest alone was $27,000.
Add taxes, condo fees etc. and investors were in much more severe negative cash flow than they would be today.
If today we assume a 5% mortgage (easily obtainable); the 10% difference from 15% means $18,000 a year. If the house price is double what it was at the peak, it still means a $9,000/year additional mortgage payment alone. After a couple to 3 years of $9K+ negative cash flow over and above the present negative cash flow; you can see why without a market recovery prices just dropped to 1992 after which they cruised along a bottom until 1996.
Long Island Mike
Senior Member
Toronto Real Estate in the 1980s: The most expensive per capita in North America?
Everyone: I have been interested myself in Toronto real estate and I was wondering
myself how the market leveled off in the 1980s...I recall learning that at one point
-I believe it was 1987- Toronto had the highest per capita housing prices in all of
North America...I was aware of the explosive growth of property values in Toronto
but I was also wondering myself if the 1987 NYSE stock market "correction" had
anything to do with the Toronto real estate market slowing down?
Are there any place to look to see how Toronto real estate fared in the 1990s and
2000s before today's huge growth in the housing market like the Condominium boom
of recent years?
Are cities like Hamilton enjoying a real estate boom of sorts because they have been
"discovered" by people priced out of the Toronto market? I recall some of this type
of movement during the 1980s when people were priced out of desirable neighborhoods...
This certainly is an interesting subject...LI MIKE
Everyone: I have been interested myself in Toronto real estate and I was wondering
myself how the market leveled off in the 1980s...I recall learning that at one point
-I believe it was 1987- Toronto had the highest per capita housing prices in all of
North America...I was aware of the explosive growth of property values in Toronto
but I was also wondering myself if the 1987 NYSE stock market "correction" had
anything to do with the Toronto real estate market slowing down?
Are there any place to look to see how Toronto real estate fared in the 1990s and
2000s before today's huge growth in the housing market like the Condominium boom
of recent years?
Are cities like Hamilton enjoying a real estate boom of sorts because they have been
"discovered" by people priced out of the Toronto market? I recall some of this type
of movement during the 1980s when people were priced out of desirable neighborhoods...
This certainly is an interesting subject...LI MIKE
daveto
Active Member
The following graph is very helpful. Note that it shows the price changes for bungalow/2-storey properties, so it is a consistent measure, not skewed down by less expensive condos.
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf
Adjusted for inflation, Toronto prices are now 20% higher then at the 1989 peak.
Also, the following graph shows that the Toronto population growth rate has been pretty steady over the past 20 years
http://cuer.sauder.ubc.ca/cma/data/Demographic/Population/population-pctgrowth-toronto.pdf
And that Toronto vacancy rates are consistent with long term averages
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/Vacancy/vac-toronto.pdf
The following shows rents actually lower now than 30 years ago (Adjusted for inflation)
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/RentIndex/rent-index-toronto.pdf
More graphs for other cities here
http://cuer.sauder.ubc.ca/cma/
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/HousingPrices/housing-pri-toronto.pdf
Adjusted for inflation, Toronto prices are now 20% higher then at the 1989 peak.
Also, the following graph shows that the Toronto population growth rate has been pretty steady over the past 20 years
http://cuer.sauder.ubc.ca/cma/data/Demographic/Population/population-pctgrowth-toronto.pdf
And that Toronto vacancy rates are consistent with long term averages
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/Vacancy/vac-toronto.pdf
The following shows rents actually lower now than 30 years ago (Adjusted for inflation)
http://cuer.sauder.ubc.ca/cma/data/ResidentialRealEstate/RentIndex/rent-index-toronto.pdf
More graphs for other cities here
http://cuer.sauder.ubc.ca/cma/
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CN Tower
Banned
In 1989 that graph shows $250k as the average price.n Today it's about $450k. I loaf of bread in 1989 cost about a buck and today about $3.50. Seems 2012 prices for housing have nowhere near kept up with 1989 prices based on that simple comparison.
daveto
Active Member
You think the inflation data from the graph (and from Stats Can) is irrelevant, and that we've actually seen 250% inflation since 1989 (6% annually) based upon your memory of the price appreciation for bread?