I have a few friends that are builders, one of them is focusing exclusively in the Earl Haig (Yonge/Sheppard/Bayview/Finch) area and he sold both of his last two houses to Chinese buyers. The last one for $2.3 million and they bought it for their 22 year old son - five bedroom house! The other one just renovated and sold a house just outside that perimeter for over $1.6 million and the people who bought it both had high ranking positions in the financial industry. Until a few years ago when the Rial dropped, there were of course a lot of Iranian buyers as well and that market has never dried up, even if it slowed a bit. Then you have the Russians, etc. etc. Overall, there's definitely a lot of first time foreign buyers driving up prices and in the long term, I think the Toronto market will be similar to London UK.
Another thing we have to remember is that non first time buyers are NOT saving up for their down payment. They're getting the majority of that money from the principle in their existing home. So, let's say you own an average home outside the city @ $750k and buy a better than average home inside the city @ $1.25N not to have to commute as much. You're really increasing your mortgage by $500k only, which is only $2400 more a month - something's that's manageable for a two income household. There's also renting the basement and reducing your mortgage that way, inheritance as the pre boom generation kicks the bucket or monetary gifts as the boom generation moves into condos, etc.
All in all though, I agree with you, prices are completely out of line with incomes - the houses are not affordable and it looks like sooner or later something's gotta give . I was saying that since 2002 and finally gave up and bought in 2006, but I have one friend who's still holding on to that belief and I was still telling him to throw in the towel in 2010, but despite being the GM at a good company he held out - now everything's 40% more. This thing seems to have no ceiling.