Canada’s Gap Between Real Estate Prices and Incomes Looks Ridiculous Beside US Data

Canadian and American real estate prices are both at frothy valuations, but look nothing alike. US Federal Reserve (The Fed) data shows home prices grew faster than incomes in Q2 2021 for both countries. The difference is, this has been a long-term trend for Canada since 2005. Meanwhile in the US, home prices have only recently begun to outpace growth. Contrasted, the gap between home prices and incomes in Canada is comically large when compared to the US.

Canadian Home Prices Have Grown 13x Faster Than In The US

The US Federal Reserve considers both Canada and the US in a real estate bubble, but they’re really not the same. As of Q2 2021, Canada has seen real home prices rise 139% since 2005. In contrast, the US has only seen real home prices rise 10% over the same period. Canadian home prices have seen 13x the growth of the US over the same period. Prior to 2005, they had charted a similar path, before disconnecting.

Canadian Incomes Grew Faster, But Not Enough To Justify Home Price Growth

Canadian incomes must have grown much faster than US incomes over that period, right? As of Q2 2021, Canadian real disposable incomes increased by 46% from 2005. In the US, incomes increased only 10% over the same period, so Canada grew faster. However, not nearly enough to justify the gap between home prices and incomes. 

Canada’s Gap Between Home Prices and Incomes Looks Ridiculous Beside The US

It’s hard to appreciate those stats, so let’s combine them to show how wacky they are. Home prices in Canada advanced 64% faster than disposable income in the country, from 2005 to Q2 2021. In the US, incomes advanced 16% faster than home prices. Homes are developing a significant premium in contrast to labor in Canada. In the US, it’s the opposite. Charting both trends together highlights how absurd the situation in Canada has become.

Canadian and American Real Estate Prices Vs Disposable Income

The indexed growth of Canadian and American real estate prices and disposable incomes, in real terms (2005 = 100). 

Source: US Federal Reserve; Better Dwelling.

Now, back to the Fed’s exuberance index showing both Canada and US real estate are in bubbles. That might be true, but it’s not even close to the same issue. Americans are trying to avoid disposable income from turning into non-productive shelter costs. In Canada, that ship sailed a long time ago. Now shelter costs and a lack of productive investment is forecast to make it one of the worst performing countries in the OECD for the next 40 years. At least there was no housing crash, right? 

16 Comments

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  • Jeremy 9 months ago

    Ive seen this graph, but how does it matter? I think it is actually bullish for the Canadian housing market because the government/central bank knows that if house prices fall it could trigger a massiv economic meltdown. I think that makes house prices a #1 priority and essentially guarantees they will never fall because the government just wont let it happen. That has catalyzed the extraordinary rush into the market because its widely considered a guaranteed path to wealth in Canada. Why would anybody sell their house? There isn’t any other practicable option that will make them more money. you might as well HELOC your existing house and buy another. That is what is going on behind this graph. Demand has increased as a result of monetary policy supporting house price inflation and incentivizing investment in the sector

    • Jeremy 9 months ago

      I mean, there is crypto and stocks for similar returns, but neither of those is backstopped by the government in the same way

    • Alex 9 months ago

      The thing about bubbles is, eventually they get to a point where nothing can stop them from popping. Canada isn’t the first country who attempted to corner a market to simulate economic growth, and we won’t be the last.

    • RM 9 months ago

      You clearly never took Econ 101.

    • Realtalk 9 months ago

      The government does not have infinite power, even if it thinks it does.

    • Zach 9 months ago

      I’m not sure why you think a government has the ability to “guarantee [housing prices] will never fall”. How exactly will they do that? Print money? Keep interest rates rock bottom indefinitely? Backstop mortgages for buyers who lack the credit to cover their own purchases? The first two are recipes for inflation. See what is happening to Argentina and Turkey right now – government’s don’t get to choose when inflation strikes, and if they ignore it their national economies start to collapse. The third is the underlying mechanism of the US housing market crash (the “subprime mortgage” crash).

      There is a difference between what people believe is a “guaranteed path to wealth” and what is actually a path to wealth.

      Only the market can determine where Canada’s housing will go in the future. Governments just fiddle, but markets set rates. And if housing starts to lose its luster due to eroding cost-benefit then people will start to sell. Let’s just hope that the government doesn’t erode the economic growth this country needs too much before that happens.

  • Trader JIm 9 months ago

    OBV. If you don’t what that means, you’re about six textbooks from understanding why the divergence is important for CAD.

  • Keith V 9 months ago

    Canada looks ridiculous beside the USA in general.

  • Mark 9 months ago

    Canadian housing should sharply collapse by about 95% and stay down 65% to 80% for 15-20 years. It’s a totally insane bubble and has been for years. Everyone knows it. This makes the ’80s look tame by comparison.

  • concernedImmigrant 9 months ago

    Canada needs to put a cap on the primary residence tax exemption, like most other OECD countries. That will give some incentive for those capital to migrate to more productive investments.

  • Albert 9 months ago

    Anyone who thinks bull markets last forever is deluded. Soon we will be celebrating the 100 year anniversary of the stock market crash and government debt couple with unsustainable housing prices foreshadow ominous signals. This modern economy can be crippled by a myriad of circumstances. W

  • tony sbrocchi 9 months ago

    Why do you continue to compare the Canadian Real Estate market with the US? They have no centralized system, any mom and pop bank can lend, WE are not the US in any way, shape or form.

    • DFW Realtor 9 months ago

      This is incorrect. US mortgages are centralized by the FHA for high ratio loans in the same way Canada’s CMHC insures high ratio loans. Conventional mortgages are primarily done via MBS guaranteed by the US government, the same way most Canadian mortgages are.

      Yes, anyone can start a bank in the US the same way anyone can start a space exploration company. It’s possible, largely only in theory.

      • RW 9 months ago

        I’m pretty sure buddy you’re responding to is a Realtor that doesn’t understand over a tenth of his market has purchase transactions funded by private lending, which is a higher ratio of unregulated loans than the US national average.

        “Mom & pop” banks in the US also lend out government-supported mortgages the same way non-bank lenders in Canada lend out mortgages. They have the same risk portfolio of the state.

        Besides that, his point should be the opposite. Canada “more regulated” environment should have less leverage than the US, not more.

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