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March 31, 2017

Chart: Toronto Housing Prices Since 1980

Note the 20+% decline that started in 1989 and lasted seven years. Toronto is not immune to a housing price decline.

A 20% decline might not sound that bad, but you have to consider the economic knock-on effects that come with a home price drop. Many industries are tied to real estate - banking, construction, durable goods, and so on. All these industries suffer, spreading the housing sickness across the entire economy.

A drop in home prices also has a negative wealth effect. When home owners feel poorer they spend less, affecting consumer spending.

Also, consider people who bought a home at or near the 1989 peak. These folks suddenly owed more to the bank than their home was worth. Many mortgages in Canada are recourse loans, meaning borrowers must pay back the full amount even if they sell their house at a loss. Thus, this negative equity scenario followed people for years, dragging down consumer spending.

Anyone old enough to remember knows that the 1990s was a rough decade for the Canadian economy, employment and currency. It's no coincidence that housing prices were falling for 60% of that decade.

Considering the degree of leverage in the system today, the Canadian economy is likely even more sensitive to house price declines than in the 1990s. 

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