Canada Has The Biggest Gap Between Real Estate Prices and Incomes In The G7

Canadian real estate is unaffordable, but you don’t appreciate how bad the reality is until you look at its G7 peers. The latest house price-to-income ratio data from the OECD shows all G7 countries are seeing affordability decline. However, Canada has consistently seen home prices outgrow incomes. Since 2005, no other G7 country has seen the gap between home prices and incomes widen this much. It’s not even close. 

House Price-To-Income Ratio 

The house price-to-income ratio is a fundamental measure of home price valuation. It’s straightforward, just measuring home prices divided by disposable income. When the ratio rises, home prices become more expensive relative to incomes. If the ratio falls, they’re becoming more affordable. 

Directly comparing countries doesn’t make much sense, so the OECD created an index. By using an index, we can rebase all countries to see how they’ve performed over time. For example, if the index reads 125, home prices grew 25% faster than income. Today, we’re using a base year of 2005 to compare pre and post-Great Recession data. 

Canadian Real Estate Prices Are The Most Overvalued In The G7

Canada’s house price-to-income ratio has soared higher than any other G7 country since 2005. The index came in at 164.8 in Q2 2021, up 19.8% from five years prior. Home prices have increased a whopping 64.8% faster than income since 2005. A whole analysis on just these numbers could be done (and will be!), but let’s look at some obvious takeaways. 

G7 House Price-To-Income Ratio

The indexed value of the house price-to-income ratio for G7 countries, as well as the OECD average.

Source: OECD; Better Dwelling.

The detachment between home prices and incomes is like nothing any other G7 country has seen. Home prices grew faster than incomes at over double the rate of the following country, since 2005. To complicate it further, about half of this disconnect occurs after 2015. Not only is Canada’s recent bubble growing as fast as Germany, but it’s on top of an existing issue. 

To appreciate this, it’s worth noting the history of Canada’s position on home prices. The current central bank head felt the country was in a bubble in 2013. That was back when he wasn’t in charge, however. Now that he is in charge, he only sees two bubbles — and they aren’t the Canadian cities that made global bubble lists

Germany Home Prices Are Growing Much Faster Than Incomes

Germany’s residential real estate market is next, and it’s not even really that close. The country’s index hit 128.5 in Q2 2021, up 27.6% from five years before. Home prices have grown 28.5% faster than disposable income since 2005 — about half the rate Canada has seen. It’s also worth noting that more than half of Germany’s growth since 2005 is from Q3 2019 and forward. 

US Incomes Have Outgrown Real Estate Prices Since 2005

The US, not known for its fiscal restraint, looks like a country of penny pinchers compared to the rest of the G7. The country’s index is 94.2 in Q2 2021, up 17.6% over the past five years. You may have noticed that this number is less than 100, meaning it’s more affordable than in 2005. 

Disposable incomes have outgrown home prices by about 5.8% since 2005. Due to recent growth, the US real estate market might technically be in a bubble. It’s not nearly as bad as it was back then, though, and compared to other G7 countries — it looks cheap… ish.

All G7 countries have seen their house price-to-income ratio surge over the past few years. This may soften the seriousness to some. After all, who hasn’t heard, “everywhere is a bubble now!” However, risks of overvaluation are significantly higher in Canada and Germany. In the case of Canada, this is complicated further by the fact that the fast recent growth is on top of low income growth.

16 Comments

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  • Mitch 9 months ago

    Average rent.

    Berlin: CA$1,150
    Toronto: CA$1,950

    We are not the same.

  • Muhammed 9 months ago

    The difference is other countries have a chance of another party being elected after upsetting decisions. Canada is built like a ponzi where no one is happy so everyone votes to “stick it to the other person.”

    Sure the quality of life is deteriorating, but who knows what the other person might do. What if our quality of life deteriorates faster?

    It’s like watching a degenerate gambler elect government.

  • Heather 9 months ago

    I am currently reading ‘Wilful Blindness’. The term ‘degenerate gambler’ sums it all up! Thanks, Muhammed!

    • Omar 9 months ago

      I think you meant to reply to the comment above, but boy does it ever. Great read. The whole country is just a mirage of competence and it’s starting to falling apart at the seams.

      • Heather 9 months ago

        I just finished reading it today. I know what you mean. I was walking through Metrotown and overhead a guy speaking Mandarine and first thought was “Is he doing a drug deal??” No, no, I am joking. But still. That book is giving me second thoughts about living in the Lower Mainland.

    • Gary 9 months ago

      No, no! Don’t read that book! I just finished it and I am now having trouble sleeping, and having good thoughts about anything during the day!

  • David Chan 9 months ago

    I’m happy with my home adding another tax free household income to my net worth per year, but at some point it’s just comical to see how this system works.

  • Justin 9 months ago

    This sums up why I moved out of Canada to another G7 country… I make more and my money goes further. I can only imagine the brain drain will increase as young Canadians realize what a bad deal their country is offering them. Your choice: Pay an unprecedented multiple of your household income or pay a rent-seeker who will outbid you for the home you will now never be able to afford. If you’re not in the top 20% of income, you only get the second choice!

  • Jappan Singh 9 months ago

    Canada will also have the highest Mortgage Fraud and Money Laundering in the G7.

  • VNM 9 months ago

    Astonishing . And even with rents only half as elevated as here , Germany recently nationalized rents in Berlin to reduce prices.

  • Dennis_K 9 months ago

    I think this article, more so than any other on BD over the past year, really illustrates the question we should be asking, in terms of getting to the root cause(s) of housing affordability.

    Why is it that prices that continue to march upward, when local incomes don’t support them? Sure, something can be popular or in high demand, but when people (who live and work in a place) don’t have the money to pay the price commanded, how can the prices stay that high (or even continue upward)? Where is the money coming from? Sure, housing prices can be higher for specific types of housing in specific geographic sub-regions, but how does this occur pan-nationally, almost completely out of line with median incomes?

    I think that when we, as a country, decide to ask how all this money is available (whether legitimately earned or otherwise), only then can we begin the process of making (policy) changes that reverse the pricing trend, and get them back down to median affordability. After all, if we don’t, then my fear is that the amount of money left over to spend on other things (aside from getting tied up in a debt-bearing non-productive asset) is less and less, and that certainly would be bad for the economy (i.e. all of us).

  • Mary 9 months ago

    My husband and I have been saving for a downpayment since 2016, just before we got married. Yet the market outpaces us every year. At this point it’s just depressing.

    • Mike 9 months ago

      I agree its depressing.. But its possible to get out from the place you are but you may need to find a different town, or space to live. Big pain – big gain.

      I bought a crap townhouse in Sarnia Ontario south end, where I couldn’t sleep half the time because of flare stacks and shunting trains smashing together at 3AM. It was hard, but it ended up paying off very well. We are in a weird spot that there are jobs everywhere in towns and cities throughout Canada, many being quite affordable.

  • J Bkool 9 months ago

    Very interesting article. Some cautionary notes. Averages for a country, especially in Canada are tricky. If we eliminate the greater GTA in Ontario, Montreal and the lower mainland in BC the numbers would be significantly different. Canada has greater growth in immigration per 100,000 population than any country in the world. We also occupy way more space per person than any country in the world.
    I also suspect that the government take on a new house in Canada is also the highest in the world, but that is a pure guess.

    • Liam 9 months ago

      Doesn’t make sense, especially since population growth was null during the most recent data points, but nice try.

  • Mark 9 months ago

    You will own nothing and be happy.

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