Canadian real estate prices are now beyond frothy, and the government says that’s fine. They believe they can prevent home prices from falling, and let incomes catch up. If you’re in government or banking, you may have already seen me explain how impossible this is. If you haven’t, this is known as the “soft landing” scenario, and it has never happened.
On many occasions, the industry declares a soft landing after a pause in price growth. Short pauses in home price growth, or prices falling briefly, aren’t a landing though. The market inefficiencies remain, and extend further once price growth continues. It would take decades for the largest property bubbles to correct by income alone. Let’s dive through the numbers.
About The Calculations
Before we get to the numbers, there are a few ways of measuring incomes “catching up.” Today we’re looking at how long it would take incomes to rise enough to carry payments on a typical home. There are other barriers such as saving a down payment, but we’ll assume you can find it on a park bench or something. That means today’s numbers will be more ideal than the reality would be, but you know, we’re optimistic for you.
For the incomes, we will use the median income of a household between 25 and 34 years old. Income growth is about 2 points, around the inflation target. It may seem reasonable today, but in the past wages have failed to keep up with inflation. This is especially true in Toronto, where the wage has actually fallen a few times. That also makes this a little more optimistic than reality.
Mortgage payments will be on a 5-year fixed rate, with a 25-year amortization. We will assume the rate is 2% this whole period, but that would require perpetual recession for Canada. Low-interest rates are typical of a weak economy, while high rates are typical of a booming economy. In other words, this will be unrealistically low, just like politicians assume.
For home prices, we will be using the Canadian Real Estate Association (CREA) benchmark. Using the aggregate benchmark reported in February 2021, more specifically. A typical home is not a detached one, so if you’re hoping for that, add a few extra years. In this estimate, home prices do not rise. If home prices increased at the rate of inflation, the same as wages, the gap would persist forever. Nice thought if you’re a homeowner, but makes less and less sense if no one can ever buy your home. Got it? Great, on to the calculations.
Greater Vancouver Real Estate Needs To Stall For 19 Years
Greater Vancouver real estate prices need to stall for a long time for this to make sense. The median household needs 19 years of wage growth outpacing home prices, to carry a mortgage. It would mean 25 to 34-year-old households would be around 44 to 54 years old when they can carry payments on home prices. That’s a very long time to move out of that one-bedroom rental. It’s also for the Greater Vancouver region, not the city — which is more expensive.
Fraser Valley real estate isn’t far behind, even though it used to be considered a suburb of Vancouver. Incomes would have to grow for 17 years to catch up to home prices, to pay the mortgage. If you’re a household between 25 and 34 years old, you would be between 42 and 52 years old. Just in time to hear previous generations talk about retiring at 55.
Greater Toronto Real Estate Would Need To Stagnate For 19 Years
Greater Toronto real estate may be a little cheaper than Vancouver, but it needs just as long for incomes to catch up. Households need to see incomes rise and prices stall for 19 years. If you’re between the ages of 25 and 34, you would be between 44 and 54 years of age before you could carry the payments. Remember, this is just for Greater Toronto. In the City, you would need longer, especially if it’s for a detached home.
Just west of Toronto in Mississauga, things only get a little bit better for incomes. It would take 15 years of home prices stalling, for wage growth to make payments affordable. Households between the age of 25 and 34 would be between 40 and 50 years old. Not terribly old, but not exactly the kind of jump in affordability you would expect to commute an hour for.
Greater Hamilton real estate, where Toronto’s young adults moved until 2019, is more affordable. It’s just not much more affordable. Households need incomes to rise for 11 years, while home prices stall, to pay the mortgage. The typical household between 25 and 34 would be between 36 and 46 years of age at that point. It doesn’t seem bad in contrast to other regions, but remember — this is an unrealistic scenario. The IMF recently warned Hamilton is the most overvalued market in the country these days.
Even if you’re willing to entertain an unrealistic scenario, the best case for a soft landing is a tough sell. Households need to see their wages grow 2 points faster than home prices, for over a decade. Almost two decades in Toronto and Vancouver. The middle-aged Millennial would be halfway through their adult working years. In which case, it may be very risky to consider a home as one’s primary retirement vehicle. That means diversifying bets, which makes astronomical down-payments even less attainable.
Meh. Past that? Sure, let’s say incomes rise faster than home prices, and it’ll only take over a decade to catch up. If that’s the case, home prices aren’t a great investment. If you’re buying the flat price growth narrative, there’s not much of a rush. If you’re buying the higher price growth narrative, remember — that’s one of the few ways cities fail.
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