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.
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.