One of Canada’s largest banks brought attention to a warning sign in many real estate markets. BMO published a research note titled “Your House Makes More Than You Do,” by senior economist Sal Guatieri. The note focuses on how sustainable and long-term current housing trends are. I’m obviously kidding. It brings attention to the fact home prices are rising faster than the incomes of the people living in them. This is typically a big “red flag,” especially in a weak economy.
Canadian Home Prices Outgrowing Incomes Is A Red Flag
The brief research note starts by highlighting the risk of rapid asset growth on poor fundamentals. Guatieri mentions, “asset prices start to raise red flags when they consistently outrun growth in underlying income or earnings.” He highlights the issue not by using one of the country’s major markets, like Toronto or Vancouver. No, the region used as an example is Woodstock, a small city in Southern Ontario.
The economists notes, home prices in Woodstock have greatly outpaced household incomes. The benchmark price of a home increased $118,200 in January, compared to a year before. The economist highlights the annual family income is only $86,970 (in 2018, latest data), much lower. The house is literally making more money than the people inside of it. Guatieri doesn’t make a conclusion, instead finishing with “draw your own conclusion.”
Woodstock Benchmark Home Price ChangeThe 12-month change in price for a composite benchmark home in Woodstock-Ingersoll, Ontario. Source: CREA, Better Dwelling.
How Does This Stack Up In Other Markets?
Over half of Canada’s major real estate markets appreciated by more than a typical family’s income. CREA data shows 23 markets saw “typical” home prices rise more than the median Canadian family makes. All of the markets are located in Ontario. That said, 33 major markets saw prices appreciate over $50,000 over the past year, or about $4,160/month. It’s worth circling back and emphasizing, this is family income. Excluded are any single person households, which significantly brings down those numbers.
Canadian Real Estate Market Price IncreasesThe 12-month increase for a benchmark home in Canadian dollars as of January 2021, and the median family income before taxes. Source: CREA, Better Dwelling.
Canadian real estate prices are detached from income in a few ways. There’s the number of months it takes for a downpayment, and the amount needed to carry a mortgage. Then there’s the issue highlighted today – home prices are rising faster than incomes. Not because of a fast increasing population, or a rapidly growing economy. It’s due entirely to the government’s desire to see household credit expand, in search of rising inflation. As Canadian economists say, “draw your own conclusion.”
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