What Happens to Toronto Real Estate Prices During a Recession?

There has been a lot of chatter about a looming 2020 global recession. I’ve heard people talk about how we’ve had a strong economic run for the last 12 years and we’re due for a recession. YouTube has even suggested videos to me called “Is a Recession Inevitable?”

Big Nose Dives, Big Waves? Technically, a recession is when you have at least 2 months of lower gross domestic product (GDP) declines, even if it’s the smallest of percentages. I think what a lot of people are worried about is whether we should expect to see another financial crisis that is similar to the one that we saw in 2008. If that happens, what will happen to real estate prices in Toronto?

In the past 13 years, there have only been 2 points in time where GTA prices took a fairly big nose dive. These periods are… continue reading by clicking here>>>> March 2009, right in the middle of the financial crisis, and the latest one occurring in May 2018, right after the foreign buyer tax was introduced. The chart below illustrates how rapidly prices fell during the last recession as compared to our foreign buyer tax implementation.

Coincidentally, the year-over-year change for both was 5.43%. If you are curious to see how much of a change it made on our real estate prices, then take a look at the chart below.

Although the financial crisis had a large impact on the global economy, it didn’t affect Toronto as much because we were a blossoming city. I’ll say it again here – our supply issue keeps getting bigger and bigger as the years progress. The biggest dip in prices occurred when the foreign buyer tax came into effect. This tells me that currency outside of North America has a bigger impact on our market than the US. So for our market to have similar effects, I would look to a financial meltdown in the Asian countries.

Where’s the Bottom? There is 100% merit in worrying about the real estate consequences if another recession comes about in 2020, but unless you buy at the absolute bottom and even if you do, your price difference is only 5.43%. The longer you wait, the greater the risk of prices continuing to escalate. As of right now in October 2019, we are just about to pass the absolute peak in composite home prices from May 2017 of $815K. That means it took about 18 months to recover from the worst price fluctuation in over a decade. We’re trending towards a tighter market and prices will likely continue to climb consistently.

The harder you try to time the market, the less money you’ll make. Remember, with real estate investing, you make money with “time IN the market, not TIMING the market”.

Who Wants a Crystal Ball? If you’re right about the recession and can time your purchase perfectly, then great, you may make an incremental 5%. If you’re wrong about timing the market, and even by a little bit, you could be losing LOTS of money. Just take a look at the trajectory of the “Greater Toronto Benchmark Price” graph above showing the fact that real estate prices have only been increasing over time. Don’t you wish you had bought something back in 2007 rather than worrying about that looming 2008 financial crisis back then?

That’s why I’ve been recommending for my investor clients to pick up a cash flow positive property and ride the time in the market. A cash flow positive property will be recession-proof because a tenant will be paying for all of the expenses and you won’t feel the pressure to sell your property if our market is severely affected by a recession. The market will rebound like we’ve seen in the past – it may take 6 months, maybe 12 months or maybe 18 months, but it’ll rebound and you’ll watch your property appreciate.

The Wrap – If this makes sense to you, then you’ll understand why I’m doubling down on the Toronto real estate market in the next 10 years. If you want to ride the next wave and move with the smart money, then make sure you email me at Zhen@PrimePropertiesTO.com. Don’t try to time the market, it’ll only cause you more stress. Just get in the market, set it and forget it!

Until Next Time – Happy Real Estate-ing!

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