Between 1985 and 1989 the average price of a house in the GTA increased by 113% in real terms
or by $240,992 in today's dollars. Low unemployment of the late 1980s and large inflow of immigran
ts to the area helped to inflate the bubble. Some critics pointed to the fact that in the early 80s many
women were still just entering the workforce and thus doubled the income of households by
the mid 80s which further fueled the bubble.
However, one could argue that bubbled was fueled mostly by massive speculative investment.
In late 80s everyone thought that the housing prices are going to rise indefinitely and that turned
real estate into a compelling investment for everyday Joe. More people jumped into the market
hoping to make a fortune causing an artificial increase in demand. Suddenly housing became
scarce, which further increased the price. Developers decided to profit on this illusive scarcity
by building condos left and right - many of them in downtown Toronto.
During the peak of the bubble the borrowing cost started increasing and the 5 year fixed mortgage
reached 12.7%. Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow
of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 average price
of a house in GTA have declined by 40% adjusted for inflation or $182,625 in today's money.
Downtown of Toronto was hit the worst with over 50% decline in value of a home.
Unaccounted for inflation, it took 13 years for the average house price to recover in the GTA.
In nominal terms, the average price breached the 1989 peak of $273,698 in 2002.
In the late 1980s, interest rates were high, some of the rules about qualifying for a mortgage
were less strict, developers started building vast amounts of new homes without
purchasers lined up and the province was about to get hit with a deep recession.