The Skin Horse had lived longer in the nursery than any of the others […] He was wise, for he had seen a long succession of mechanical toys arrive to boast and swagger, and by-and-by break their mainsprings and pass away, and he knew that they were only toys, and would never turn into anything else. For nursery magic is very strange and wonderful, and only those playthings that are old and wise and experienced like the Skin Horse understand all about it. (4)
The oldest toy in the nursery is the only one that really understands its magic. Sure the fancy new-fangled toys might walk around bragging about their cool moving parts, but they don't have any clue about the enchantments all around them. They're not believers.
"What is REAL?" asked the Rabbit one day, when they were lying side by side near the nursery fender, before Nana came to tidy the room. "Does it mean having things that buzz inside you and a stick-out handle?"
"Real isn't how you are made," said the Skin Horse. "It's a thing that happens to you." (5-6)
The Rabbit is kind of confused about the whole Real business. He thinks that a toys that moves around with springs inside can claim to be "real," but the Skin Horse explains that being Real is something different all together. It's a magic that can only happen when a child loves you for a really long time.
"I suppose you are real?" said the Rabbit. And then he wished he had not said it, for he thought the Skin Horse might be sensitive. But the Skin Horse only smiled.
"The Boy's Uncle made me Real," he said. "That was a great many years ago; but once you are Real you can't become unreal again. It lasts for always."
The Rabbit sighed. He thought it would be a long time before this magic called Real happened to him. (11-13)
So that's why the Skin Horse looks so beat up—he's a hand-me-down toy and he's Real. Apparently, it doesn't matter if your old owner grows up, as long as a child once loved you, you'll always be Real. That's a comforting thought.
"Give me my Bunny!" he said. "You mustn't say that. He isn't a toy. He's REAL!"
When the little Rabbit heard that he was happy, for he knew that what the Skin Horse had said was true at last. The nursery magic had happened to him, and he was a toy no longer. He was Real. The Boy himself had said it. (22-23)
This is probably the best day of the Rabbit's life. He knows that once the Boy says he's Real then something powerful has taken place. He's not a toy—he's loved, he's Real, and he can never go back to being unreal.
"He doesn't smell right!" he exclaimed. "He isn't a rabbit at all! He isn't real!"
"I am Real!" said the little Rabbit. "I am Real! The Boy said so!" And he nearly began to cry.
Just then there was a sound of footsteps, and the Boy ran past near them, and with a stamp of feet and a flash of white tails the two strange rabbits disappeared.
"Come back and play with me!" called the little Rabbit. "Oh, do come back! I know I am Real!" (44-47)
Okay, but this run in with the wild rabbits doesn't go so great. They don't think the Rabbit is Real. But he never loses faith in the nursery magic. He still believes that he's Real. If the Boy said that it's true, it must be so.
To [the Boy] he was always beautiful, and that was all that the little Rabbit cared about. He didn't mind how he looked to other people, because the nursery magic had made him Real, and when you are Real shabbiness doesn't matter. (51)
This is the power of love…and of the nursery magic. Sure, the Rabbit is getting all scruffy looking (just like the Skin Horse), but he doesn't care. He's Real but he still feels beautiful because the Boy loves him. It's like they're both under a spell.
And a tear, a real tear, trickled down his little shabby velvet nose and fell to the ground.
And then a strange thing happened. For where the tear had fallen a flower grew out of the ground, a mysterious flower, not at all like any that grew in the garden. It had slender green leaves the colour of emeralds, and in the centre of the leaves a blossom like a golden cup. It was so beautiful that the little Rabbit forgot to cry, and just lay there watching it. And presently the blossom opened, and out of it there stepped a fairy. (63-64)
Okay, this is straight up enchanting. The Rabbit lets out a real tear and out of that tear blooms a flower and then a fairy.
"I am the nursery magic Fairy," she said. "I take care of all the playthings that the children have loved. When they are old and worn out and the children don't need them any more, then I come and take them away with me and turn them into Real."
"Wasn't I Real before?" asked the little Rabbit.
"You were Real to the Boy," the Fairy said, "because he loved you. Now you shall be Real to every one." (68-70)
This is the nursery magic Fairy (obviously) and she's come to make the Rabbit really and truly Real. Of course, he was Real before, but now everyone will see that he's Real. Cool. That's way better than being burned in a bonfire. Nice upgrade, Rabbit.
"Run and play, little Rabbit!" she said.
But the little Rabbit sat quite still for a moment and never moved. For when he saw all the wild rabbits dancing around him he suddenly remembered about his hind legs, and he didn't want them to see that he was made all in one piece. He did not know that when the Fairy kissed him that last time she had changed him altogether. And he might have sat there a long time, too shy to move, if just then something hadn't tickled his nose, and before he thought what he was doing he lifted his hind toe to scratch it. (75-76)
Even the Rabbit doesn't seem to believe the magic in this story. When the Fairy kisses him, he turns into a wild rabbit, but he stays completely motionless like he's still a stuffed animal when he sees the other rabbits. Finally, he figures out that he can actually move around and he's psyched. The nursery magic has done its work and the little Rabbit is home at last. Aww.