The lies we tell ourselves about house prices

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The crazy run-up in Toronto housing prices has been blamed on a lot of things, from foreign buyers and absentee owners to high immigration levels and low interest rates. All play some role, but another, equally powerful factor may lie in our heads.

We are wired to think what is happening now will continue to happen. That is particularly true if something has been happening for a long time. Real estate prices have been rising more or less without pause for a quarter-century. The streak has been so long that the last time there was a serious drop is a distant, almost historical memory, like some story your grandpa told about the war.

Many, many times over those years, the experts have said it was bound to end soon; that prices were inflated; that a crash was coming; that the bubble would burst. It never has and now the conviction has taken hold that it never will. Toronto, its residents will often tell you, is a good place to live, a booming metropolis attracting hundreds of thousands of newcomers, all seeking a roof over their heads. With such powerful demand and a limited supply of housing to satisfy it, prices are bound to keep rising. It’s simple economics.

But as York University academic George Fallis argued in The Globe this week, a perceived lack of housing supply can’t be the whole reason. “Demand is also influenced by expectations about future prices – if you expect prices to keep increasing, you are willing to pay more today.”

Look at a fever chart of Toronto house prices over the past 25 years – and fever is the right word. “Average price has soared over the 25-year period, rising close to 453 per cent, from $198,150 in 1996 to $1,095,475 in 2021, at a compound annual growth rate of 7.08 per cent,” says a recent report by Re/Max. The Toronto area’s population rose by 45 per cent in the same period, so something other than just supply and demand is at work here.

Economics isn’t a lifeless set of rules. Human feelings, we all know, have an enormous influence on how markets rise and fall. The most powerful emotions are greed and fear. Both are at play in the current mad surge in prices.

With prices for all home types in the Toronto region up a staggering 28 per cent between this February and last February, buying real estate looks like a no-lose proposition. Investors large and small are piling in, figuring on easy money. Would-be homeowners, meanwhile, are rushing to buy before prices sail further into the stratosphere. The news that interest rates are set to rise only adds to the panic. Buyers figure they had better lock in now, while mortgage rates are still at rock bottom.

You can see the evidence of their desperation all around. Crummy houses in modest neighbourhoods are going for more than a million. Some sellers get several hundred thousand over the asking price. The average price of a detached house in Toronto has now crested $2-million for the first time. If this isn’t a bubble, I don’t know what is.

Unfortunately, there is no such thing as a no-lose investment. The housing market is like any other: stocks, gold, oil. What goes up will some day come down. Toronto real estate took a plunge at the end of the 1980s and didn’t recover for years. Just because it hasn’t happened in a long time doesn’t mean it can’t happen again.

The prices some buyers are paying for mediocre houses are plain crazy. Young couples are taking on crushing debt to get their foothold in the market. Others have given up even hoping to buy a home of their own.

At some level, everyone knows it’s nuts – we just can’t get off the escalator. “Buy land. They aren’t making it anymore,” goes one old saying. “The best time to buy a house is always five years ago,” goes another.

To many, that seems especially true in Toronto. We have convinced ourselves that Toronto housing is special, different, unique, invulnerable. It isn’t.

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