Canadian real estate prices have increased at such a rapid pace, incomes aren’t even close. US Federal Reserve calculations show home prices in Canada have increased multiples of the rate of income growth as of Q3 2021. Most people have some idea how strange this situation is, but we need to zoom out to appreciate it fully. Canada has seen this trend persist for decades, it’s only beginning to accelerate now. The country has depended on credit to make up for a lack of earnings for so long, no other G7 country even compares.
Canadian Real Estate Prices Are Growing 12x Faster Than Income
Canada’s gap between home price and income growth is borderline absurd. Real (inflation-adjusted) home prices showed annual growth of 21.4% in Q3 2021. Disposable incomes grew 1.7% over the same period, having pulled back from peak. Over just the past year, home prices grew 12.5x faster than incomes. A remarkable gap that fails to show any fundamental reason for home prices other than credit.
G7 Real Home Prices
The inflation-adjusted indexed value of real home prices across G7 countries.
Source: US Federal Reserve; Better Dwelling.
If it was just a year, it might not be noteworthy. That’s not the case in Canada — it’s been completely out of whack leading into the Great Recession. Since 2005, real home prices have increased by 138.7% as of Q3 2021, while incomes climbed 45.3% over the same period. Germany is the next closest country for home price growth, and it only grew 49% over that period. Not really close at all.
To be fair, most of the home price growth appears to accelerate after a rate cut in 2015.
G7 Real Disposable Income
The inflation-adjusted indexed value of real disposable income across G7 countries.
Source: US Federal Reserve; Better Dwelling.
Canada’s massive gap between real home prices and disposable income goes further. Since 1975, real home prices grew 306.6%, but disposable income advanced just 102.3% in the same period. Home prices grew 3x faster than incomes over a long period. It only accelerated faster recently.
Comparing Canada To The US Highlights How Absurd The Situation Has Become
The US, not exactly known for affordable housing, highlights this disparity. Real home prices in the US grew 114.7% since 1975, with disposable incomes rising 119.6% in that period. Even with the absurd level of home price growth in the US, incomes managed to largely keep pace over the long run. That’s not something Canada can say.
Canadian vs American Real Home Prices and Income
The inflation-adjusted index value of home prices and disposable income for Canada and the United States.
Source: US Federal Reserve; Better Dwelling.
Canadians can debate the role of supply and demand all they want, but this is unusual behavior. Canada embraced non-productive credit growth, and didn’t have an efficient place for it. This inflated home values, and supported the massive disconnect from household incomes. Some argue this produced significant wealth for primary residence owners. However, it’s only fully realized if the next generation can continue to borrow more. That gets difficult when you have some of the world’s most highly indebted households.
Everyone says “my home’s worth x!” But when I ask them if someone wrote them a cheque for x and they say no, I say then it’s not worth x is it? And then their head explodes. The real question is what Will it be worth the day you need to sell it?
It will worth N times X where N is the year multiplier … haven’t you noticed? it only goes up!!! regardless of what happens in the world (good or bad) Canada was not and will not be affected since RE is more important than anything else. I am looking at the sales in Lower Mainland and the majority of detached and TH are sold over asking when everybody is crying this is the worst time to buy. Where do you thing these funds are coming from??? I can reply with listing numbers even though anyone can make an account on zealty dot com where you can see how much it was sold for. I cannot believe what I am seeing.
then in the next few months, they sell and get a cheque of 2x.
Two months ago, three buyers told my condo is overpriced, and i need to reduce the price. I increased it, and now sold for overasking.
Too bad. C’est la vie.
Exactly!
Now that residential real estate has been financialized and considering how far out valuations are, we may be surprised at how fragile and sensitive Canadian real estate has become.
A very large number of dwellings are now investor-owned (rather than end-user owned) and they own for two reasons only – expected appreciation and steady fixed cash flow – and both are linked to valuation/price. If an initial price decline occurs and a new trend downward appears imminent, many owners of investor-owned dwellings would be very motivated to sell (and may move quick).
Pile other potential sellers/holdouts on top of that – retirees or near-retirees looking for top dollar; those who bought too much house in the last few years and worried about being underwater; possible casualties if a recession ensues; etc. – and there could be quite a waterfall of new listings.
Suddenly, we’ll see that supply was never the issue! It was house hoarding & holding out (caused by policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. TURNOVER is the issue – everyone wants to hold onto the golden goose…until it becomes rotten.
At the same time, excessive demand was pulled forward due to FOMO and inappropriately easy policies.
Someday, with new listings growing (and actual supply growing at a significant clip), investor demand waning, and local end-user demand diminished by being pulled forward, prices will likely continue to erode. Any interested buyers are likely to ‘stand back’ as prices drop to find their new fair equilibrium that is better supported by fundamentals.
Amid all this, a persistent level of consumer inflation may impede the usual “prop” options of “massive fiscal injections” or “dropping rates to .25%”, especially if the rest of the world is not recessioning yet. (If a global recession ensues in the next year or two…eep.)
Never before in the history of humankind has a bubble continued indefinitely. This time will be no different. Eventually, these sorts of absurd imbalances can’t be continued and the elastic will snap back. The big question is – when might this happen??
Soon we’ll see that supply was never really an issue (but just a convenient pretend boogyman to raise prices). The issue is investor house hoarding & holding out (caused by inappropriately easy policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. TURNOVER is the issue! – everyone wants to hold onto the golden goose…until it becomes rotten.