ECON 1201: Discussing Toronto's Housing Market & Economic Principles

This assignment analyzes a news article discussing the decline in the Toronto housing market in May 2017. It highlights the key economic principles of demand and supply, and irrational exuberance. The analysis explains how increased supply and decreased demand led to falling home prices, illustrated with a supply and demand diagram. The concept of irrational exuberance, where sellers hiked prices due to greed, is also discussed, showing how it contributed to reduced demand and sales. The essay references the Toronto Real Estate Board (TREB) data and relevant academic sources to support its claims, providing a concise overview of the market dynamics and the factors behind the decline.

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“THE GREATER TORONTO AREA’S HOUSING MARKET”
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“3. Please discuss the following excerpt from a recent news article from the McLean’s web
page. Highlight the key economic principles that are in the article.”
This article discusses the trend of the housing market in Toronto. Homes sales, as well as home
prices in Toronto, have been rising at an extraordinary rate for the last two years (2015 and
2016). In May 2017, a decline in Toronto’s housing market was recorded. The article attributes
the introduced measures aimed at countering the “Greater Toronto Area’s overheated housing
market” as being accountable for the decline.
The “Toronto Real Estate Board (TREB)” data shows that in 2017 May, home sales in Toronto
declined by 20.3 percent as compared to 2016 May. Demand for home sales was declining as the
supply for new home listings was increasing and this led to a decline in home prices by 6.0% in
2017 May considering the previous month of April.
The decline is better explained by the traditional approach of sales to new listings ratio. A ratio
of 40 to 60 percent indicates a market which has balanced demand and supply (Liu, Nowak and
Rosenthal 2016, p.55). A ratio above 60 percent shows a market dominated by sellers while that
below 40 percent shows a market dominated by buyers. This ratio was 81.5% in February 2017
in Toronto. As a result, sellers dominated the market and hiked prices. Buyers reacted and
reduced their demand and this led to a decline in the ratio to a low record of 39.5% in May 2017.
This made the demand extremely low and as a result home sales and prices in Toronto declined
significantly. The decline is likely to persist for the next few months as buyers remain skeptical
about the future outcomes.
The key economic principles highlighted from the article are demand and supply and irrational
exuberance. Due to the increasing new home listings supply and decreasing demand, home

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prices in Toronto declined. The demand curve shifted towards the left direction whilst the supply
curve shifted towards the right direction leading to decreased home prices as illustrated below.
From the diagram, the quantity demanded decreased from Q0 to Q2 while home prices decreased
significantly from P0 to P2.
The concept of irrational exuberance indicates that home sellers hiked prices due to the greed for
profits without considering the future consequences (Layton 2010, p.303). As a result, home
buyers reduced their demand significantly leading to a decline in home sales as indicated in the
diagram below.

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From the diagram, a price hike to P1 leads to a significant decline in quantity demanded from Q0
to Q1 while the quantity supplied increases from Q0 to Q2.

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References
Layton, L., 2010. Irrational exuberance: Neoliberal subjectivity and the perversion of
truth. Subjectivity, 3(3), pp.303-322.
Liu, C.H., Nowak, A. and Rosenthal, S.S., 2016. Housing price bubbles, new supply, and within-
city dynamics. Journal of Urban Economics, 96, pp.55-72.