I was reading the book Modern
Romance by Aziz Ansari the other day in the hopes of trying to make sense
of my disastrous dating life. As I was
learning about the intricacies of modern dating and munching on some of those
delicious Costco deluxe nuts, I got an email from a friend with an attached
news article. Here are some of the highlights of that article written by Michael
Salter:
“HOT, HOT HOUSES Forget all those conspiracy theories about what's
behind the crazy Toronto real estate market. Here are the real reasons why
house prices are soaring - and why they'll stay high
Absolutely everyone from cab
drivers to chief executives has a story about Toronto's crazy housing market. How
about the professional couple - he's a professor, she's a school teacher - who
sold their spacious house in Calgary, moved to Toronto and discovered they
couldn't afford to buy a thing?
Politicians and tenants' groups
have declared a housing "affordability crisis" - again - and have
called for a tax on speculators' profits to cool down the frenzy. Dark words
are muttered about how foreign money is to blame.
And, to make matters worse, land
is in short supply. Builders and developers point the finger at provincial and
municipal governments, which refuse to let them pave over prime southern
Ontario farmland as fast as they'd like.
Residents of this huge, rich,
expensive urban conglomeration have taken somewhat hopefully to calling their
city "world class." But the price of being world class is
"Manhattanization" Torontonians are getting a taste of the housing
problems of the world's major cities.
Every upward spiral causes a
stampede of buyers desperate to get into real estate before prices move out of
reach. And because large houses appreciate faster than small ones,
"there's a tendency to move up and take on as big a mortgage as you can
afford because then you'll gain more," says Steinberg. "Residential
real estate has become a commodities market. That's why there are so many
investors and speculators involved."
To cope with high costs, it's
become standard practice for house-poor owners to build and rent out a
self-contained apartment.”
I read through this article and
was perplexed as to what was so special about it. This article pretty much sums
up all the newspaper and blog articles most of us have been reading over the
past 7 years or so. Toronto is a world class city, we are now a mini-Manhattan,
there is a shortage of land, foreigners are buying up all our property, no one
can afford anything and if you can afford something you need to rent out the
basement to some weird guy you found on Craigslist. Pretty standard stuff for 2017.
There was only one problem. This
article was written in 1988.
The late 1980’s was, in my humble
opinion, the golden age for music legends like Michael Jackson, Madonna,
Whitney Houston, Metallica, Poison, Pet Shop Boys, Guns N’ Roses and many other
notable artists. It was also a time of
excess and people spent money as if it was going out of style. Cocaine was a
popular recreational pursuit for many - a true chemical romance of the times. Most people reading this blog were likely
playing with a Gumby toy at the time.
Anthropological references aside,
Toronto was also was in the midst of property boom like no other. Prices increased an incredible 150% in the
span of just 4 years or so while incomes increased only 2-6% per year! People
became completely obsessed with buying and flipping properties more than those
guys on HGTV's Property Brothers, if
that was even possible. Builders could not keep up with the insatiable demand
from the public.
I attempted to dig deeper into the
Toronto 80’s real-estate fiasco, but was unable to locate much since likely no
one cared to write and/or read a book on the topic. As I was dumped out of the blue the other
week, I suddenly had a lot more free time and needed to put it to good use so I
went to the library and dug up the old newspapers for a few hours (thankfully they
were electronic).
From 1985 to the end of 1989 there
was an absolute tidal wave of interest in real-estate in Toronto and
surrounding areas. Houses and condos were built as fast as possible and were
sold as quickly as they were built. Prices began to rise sharply and homeowners
were quite delighted with the paper gains on their property. Many developers and "financial advisors" urged young couples
to buy as soon as they could as they would be "priced out forever"
should they not. It certainly wasn't
factually wrong - prices were increasing faster than people could save for the
traditional downpayment which was around 25% at the time. There were many
couples who saved enough money for an average house in an average neighborhood
only to find out that within months properties would increase by double digits
and they could no longer buy.
Many people wrote letters
proclaiming how they could not afford entry level properties in Toronto and how
they were forced to look to faraway lands such as Brampton, Pickering, Mississauga
and even, gasp, Thornhill. Housing affordability was a crisis. There was a suspicion
that rich people from Hong Kong were buying up all sorts of land and houses
before mainland China took over in 1997.
Hundreds of thousands of immigrants were coming to the city and they
needed a place to live. Builders would constantly complain that there was a
supply issue and if they could only build more, young couples could only then
afford to buy. There was fear that
speculators had purchased homes and left them empty only to sell them for a
higher price a few months later. There
were pleas for the government to "get involved".
At the time, the vacancy rate in
Metro Toronto (prior to amalgamation) was 2 in 1000! That is 0.2% compared to
our current vacancy rate of 1.8%! Fair to say that finding a rental was
exceptionally difficult during that period.
As prices began an almost upward
trajectory, panic buying ensued where there would be bidding wars on dilapidated
properties. Young couples turned to the
Bank of Mom for gift money so they could get in on the action. Purchasers began
resorting to vendor-take-back-mortgages (VTB) whereby the seller of a property
would in effect lend the buyer a portion of the downpayment and take a second
mortgage on property. Think about that for a moment. You and your significant
other scrounge up your life savings to buy a home and on the day you move you
have TWO mortgages on the property and you might owe your mother-in-law a
lifelong debt of gratitude! Talk about a stressful way to wake up every
morning.
What was truly interesting was the
advertisements in the Toronto Star as prices progressed rapidly. At first it
was mostly major lending institutions and some B-rated lenders who were
offering financing. At the end of the 1980's all kinds of lenders came out of
the woodwork and were offering "mortgages in minutes". Now this was
1989 before we had the Internet and the fax machine was still the king of the
telecommunication world. How on earth
could a lender access all the relevant information to make a prudent decision
on lending several hundred thousand dollars when the world was still using
paper and pen, all in "several minutes"?!
On December 16, 1989, at the peak of
the mania, one developer took out an ad proclaiming to have innovated the
"zero-down payment option" to finally solve the housing affordable
crisis once and for all. In essence, the borrower would put up nothing, get the
keys and have no proverbial "skin in the game". Sound familiar? It should, it's the same type
of product that was accessible in the US during their housing mania and the
same product that can be arranged here today - more on that in a different blog
post.
To anyone who just read just a
small sample of the news articles from 1985-1989, it was clear that by 1989 a
shadow as wide as the Berlin Wall loomed over the land. Average people were
unable to buy average homes; incomes simply did not keep pace with the large
price increases. All types of people
from the restaurant server to the school teacher bought properties solely to
flip them within a year or so to realize fat gains. Many homeowners made more money from the
paper gain on their house in a year than what they actually earned at their
jobs. Lenders were offering too much
money to people who simply did not earn enough and/or were not creditworthy. Financial advisors, real-estate agents, the nice lady at the bank and lawyers all failed to warn their clients of the dangers of buying too much
house with too much borrowed money when prices increased well beyond the long
term fundamentals. Interest rates were
also on the rise as inflation was picking up steam. Smoke was billowing and
there was not a fire fighter in sight.
Take a guess what happened next in
this story.
