Canada

Canada Has The Second Most Overvalued Real Estate of Any Advanced Economy

Canadian real estate prices are pushing the limits of affordability. Not just for Canada, but any advanced economy. Canada came in second on the OECD house price to income ratio index. The index, measuring an affordability fundamental, shows the country’s housing is severely overvalued. It also reveals Canada has the second fastest growing gap between home prices and incomes in the developed world.

House Price To Income Ratio

The house price to income ratio is a fundamental of housing affordability. It’s the ratio of the market price of a typical property as a share of household income. Rising ratios mean home prices are outpacing incomes for growth. This is considered a deterioration in housing affordability. Falling ratios mean incomes are outpacing home prices, an improvement in housing affordability. 

Cross-country comparisons need normalization, so the OECD created an index. They set 2015 at 100 and the indexed value shows the change from that period. For example, if the index is 110, home prices have grown 10% faster than household incomes since 2015. An index of 90 would mean incomes gained 10% on home prices. The idea is to measure how fast these metrics are changing, to address them before they turn into a problem.

Canadian Real Estate Prices Grew 42% Faster Than Household Incomes

Canadian real estate prices have surged for years now, but it isn’t due to an income boom. The index reached 141.9 in Q4 2021, which means from 2015 home prices increased 41.9% faster than incomes. Since 2000, home prices have more than doubled the pace of income growth. Home prices recently surged in most advanced economies. However, you can probably guess that Canada is a totally different animal.

OECD House Price To Income Ratio

The indexed value of home price to income ratios for OECD countries. 2015 = 100.

Source: OECD.

US Real Estate Prices Grew 30% Faster Than Incomes

Let’s start this comparison by looking at home prices in Canada’s neighbors to the south. The US house price to income ratio index reached 130.5 in Q4 2021. Home prices grew 30.5% faster than incomes since 2015, but just 23.1% since 2000. Canadian prices are outpacing incomes 10 points faster than the US since 2015. From 2000, Canada’s gap between home prices and incomes grew almost 5x faster than the US.

Canadian Real Estate Prices Have The Second Fastest Growing Overvaluation In The OECD

No G7 beats Canada’s overvaluation, so let’s broaden our search to all OECD economies. The Netherlands Index value hits 148.3 in Q4 2021, showing a massive leap in just six years. It’s the only advanced economy with a higher ratio than Canada. The situation in Canada is anything but normal.

Nearly all advanced economies have seen home prices soar, but not like Canada. Only one other country has a faster growing disconnect, and it’s a tiny economy. Almost 3 dozen other developed economies are lagging, which is good news for them.

Canada’s massive gap is partially due to the sheer length it has persisted. After central banks overstimulated markets in 2020, prices surged nearly everywhere. In contrast, Canada was flagged by the US Federal Reserve back in 2015 for housing exuberance. By 2016, the country’s real estate fit the criteria for a full real estate bubble. Home prices have been on a breakaway for almost half a decade, leading to an unreal gap. Experts warn the wider this gap gets, the more pain it will require to correct.

15 Comments

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  • Ron Bruce 2 months ago

    Tell me that money isn’t sneaking in the back door from foreign destinations. Nominee money handlers are available across Canada and already live and operate here. Canada’s Real Estate Casino is open 24/7. Lawyers of every persuasion and the Banks will never represent the Canadian Taxpayers, who are forced to compete on the global stage. The Canadian worker can’t afford a home in Canada, which is of no concern to the Provincial or the Federal Government. This is one reason why the National debt has passed a trillion dollars.

    • Yoroshiku 2 months ago

      Untold billions in dirty foreign money have been “snow washed” through Canadian real estate. The provincial and federal governments don’t seem too keen to act on that because they want to keep the bubble going because Canadian economy is so heavily (and probably unhealthily) dependent on real estate.

      Money launderers buy and sell houses using numbered corporations and shell companies and nobody in gov’t seem to care, as long as real estate prices continue to climb.

      One ‘cure’ for this problem is a publicly accessible registry of beneficial ownership. If buyers lie about who the beneficial owners are the properties should be seized and sold. There are many 19 year old “students” with no incomes living in $20M Vancouver mansions. It’s absurd.

      There are a lot of other factors driving the bubble too–artificially low interest rates, FOMO, speculation, and the widespread notion that you “can’t lose” in Canadian real estate. Very few Canadians think that real estate can or will ever fall in value here.

    • Castreau - the illigitimate 2 months ago

      Ron, you are so correct pointing this out and for how many years now? This issue was allowed by the banksters capturing the political class and so called regulatory agencies in their money bags. Really think about this, the CMHC and OSFI giving themselves bonuses (where did the money come from as they produce ZERO in terms of GDP) as they cheered on while the BoC was allowing the usual suspects like RBC,BMO,TD,Scotia,HSBC etc… to create loans out of thin air using the refi-heloc products being advertised everywhere** even YouTube!
      This was never money earned by increased wages or anything close but simply added debt loads to the CDN tax payers. And again, who are the tax payers as over 60% of employment is in the form of government or subsidies.

  • Scott M 2 months ago

    The money sneaking in the back door will likely reduce due to seizing truckers bank accounts. There used to be a 10% tax on foreign purchases many years ago, why not now?

    • Candice 2 months ago

      They don’t plan on correcting it. The politicians and their rich friends are robbing the Canadian citizens, robbing and stealing them from them with a smile on their face

      • Castreau-the illigitimate 2 months ago

        Not just a smile. A shit eating smile on their face.

  • Arthur 2 months ago

    Canada Revenue Agency needs some legislative help with property ownership details. To connect the dots on sales there needs to be a registry recording all sales reporting for tax reporting purposes. Where the sale links to a Canadian tax payor responsible for annual tax reporting then sale proceeds can proceed as normal. Any capital gains tax levied in due course. Any tax avoiders prosecuted in due course.
    Where no tax linkage is available then a form of non-resident withholding tax on the full sales amount should be collected from the proceeds and remitted directly to Canada Revenue Agency. Lots of scope for investors local and foreign, personal and business to pre-register with CRA without any need to grandfather their existing investments.
    It’s long overdue for a simple solution to ensure a fair playing field for Canadian and foreign tax payers – it’s also fair for non-payors to face the consequences. All we need is a responsible government.

  • Chris 2 months ago

    Advanced economy lmfao. That’s fucking funny.

  • Smug Canadians 2 months ago

    It’s gonna be okay. The Russians and Chinese are going to be pulling out in droves (Russians already are in luxury homes), especially as rates normalize and the market flattens. No more reason to keep it here! Just wait! It will be a rollercoaster.

    • Yoroshiku 2 months ago

      Russian and Chinese baddies would prefer to keep their money in a country where the rule of law is strong and their properties cannot be arbitrarily seized by somebody like Xi or Vlad.

    • Peter 2 months ago

      The Russian’s aren’t pulling out in fact they are trying to get their money out for Russia and stash it in a safe haven such as Canada. The Chinese are doing the same that is why the CCP is restricting capital transfers out of China.

  • Anna 2 months ago

    Most Overestimated, overpriced real estate I’ve ever seen. Toronto is fine. It’s not worth paying this crazy amount for what the city offers. The most amazing thing about Toronto was its character, the brick buildings, the history seen in each neighbourhood. They’re turning the city into a nightmare of highrises condos, pharmacies and fast food joints in every corner. But this is not news. I’m not the first one saying this.

  • Patel 2 months ago

    Canada is in a complete state of catastrophe. All economics, math, and statistics books must be ripped apart and burned to ashes. Everything needs to be rewritten based on Canada’s glorifying unprecedented longest robust housing bubble. I’m a master’s in Economics however it is difficult for me to digest current numbers from a perspective of GDP, inflation, debt ratio to population, and most important unleashed government spending. To justify the current house price either Canada’s land size should be Nauru island with a maiden individual income of $2.5k per annum.

  • Patel 2 months ago

    Canada is in a complete state of catastrophe. I feel that the recent economics, math, statistics books must be ripped apart and burned to ashes. Everything needs to be rewritten based on Canada’s glorifying unprecedented longest robust housing bubble. I’m a master’s in Economics however it is difficult for me to digest current numbers from a perspective of GDP, inflation, debt ratio to population, and most important unleashed government spending. To justify the current house price either Canada’s land size should be Nauru island with a maiden individual income of $2.5k per annum.

  • Castreau-the illigitimate 2 months ago

    Don’t forget to point out the obvious that no other G7 nations banisters and CMHC bureaucrat types gave themselves as many bonuses either!
    The scam has been pointed out many years ago, banks have captured our regulators in their money bags. No actual income increases permitted this ponzi to continue but only the BoC, so called regulatory agencies like CMHC or OSFI that were cheering on the commercial banks like TD BMO RBC Scotia bank to create more loans simply by taking equity out of existing properties and puff goes the magic dragon. CANADA must be the land of unicorns and financial OZ wizardry like no where else on earth!

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