Canadian Real Estate Wealth Went Vertical, and That’s A Problem: BMO

Canadian real estate is increasingly flashing warnings after detaching from incomes. Sal Guatieri, a senior economist at BMO, found another one — home values as a percent of income. The indicator calculated by Statistics Canada (Stat Can) shows home prices climbing much faster than incomes. It almost looks like a plotting error, as homes continue to earn more than the people in them. 

Canadian Real Estate Is Now 562% of Disposable Income

Canadian real estate wealth as a share of disposable income launched higher. Stat Can data shows it hit 562.2% in Q4 2021, up 23.9 points from the previous quarter. Compared to a year ago, the share gained a whopping 86.2 points, almost a whole year of income. It’s not just frothy cities like Vancouver, but right across the country. 

“If you need more evidence that Canadian house prices have become detached from one key fundamental driver, income, take a look at the slope of the series in the chart,” says Guatieri.

Canadian Real Estate As A % of Income

The share of residential real estate assets as a percent of disposable income in Canada.

Source: Statistics Canada; Better Dwelling.

“It shows the value of household real estate assets, relative to after-tax income, went nearly vertical last year,” he explains. Rapid credit expansion is fueling higher home price growth, making up for a lack of income. Canada has never seen anything like this.

The Vertical Climb Doesn’t Include The Record Price Growth

The recent vertical rush doesn’t even capture the record price growth over the past two months. “And, this is before a record price increase of nearly 7% in the first two months of this year. The typical family doesn’t see that much increase in income in two years,” he said. 

Disposable incomes have flatlined recently, while home prices only surged faster. Such rapid price appreciation isn’t just setting off alarm bells at BMO either. Recently Oxford Economics called out the massive disconnect between fundamentals, forecasting falling prices. They warn there is a small possibility Canada tries to extend this price rally. If they do, the country is beginning to flirt with the possibility of a “financial crisis.” 

10 Comments

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  • John 9 months ago

    It’s not the price of the home he should be plotting against incomes. He should be plotting the monthly payments against incomes. As interest rates have fallen to all time lows, payments have too, causing demand to drive house prices up. Granted, monthly payments relative to incomes are higher than historical averages, but not nearly as much higher as house prices versus income.

    • Kevin Logan 9 months ago

      That’s not how it works, since home prices rise with every low rate shock producing more wealth but causing more inflation (deterring international investment).

    • Richard Allen 9 months ago

      mostly agree, but eventually, all that money needs to be repaid, no? I mean, if rates are stable, then yeah, you just refinance, but if rate raise significantly (a word you can define as you will) then payments rise, without getting more house….

  • Im Therious 9 months ago

    A telling time frame from this chart would have been the 1950s-80s when real estate tanked and presumably didn’t look like this portion.

    As this metric is a percentage, there likely would be upper and lower ranges. However, in the housing utopia that is Canada, it can only go up!

  • Scott 9 months ago

    At least, with the NDP agreement, they will still be in power when the music stops in a couple of years. It’s going to be ugly…

  • John 9 months ago

    Yes .. most likely very ugly when the music is over. Remember when Bob Rae bankrupted Ontario? They loved him when he gave them all a 7% raise in the depths of the 1991-1993 recession when there was ~14% unemployment in the private sector .. then they hated him when the stack of cards collapsed. Harris came in and made all the tough decisions to get Ontario solvent again.

  • Chris P. 9 months ago

    This is the Bernie Madoff type of miracle.
    With household earnings of $200K, and $100K down payment, one can afford maximum $914K house in Ontario. Since a small minority of families make 200K and tiny minority of real estate can be bought for less than a 1M (Toronto), how can there be a record number of sales??? But houses for 1.5-2.M sell like hot cakes! The question is not” who buys them?”. The question is “Why no one in the media wonders out loud about the impossible math!”
    Because if the government is in on it, don’t hold your breath waiting for the crash.

  • PatK 9 months ago

    With the Canadian dollar at risk, people are jumping into real-estate as safe harbour. Better to own something solid, than the paper that banks are playing with. I do remember .59 cent hamburgers.

  • John 9 months ago

    Yes .. the money does have to be paid back – and if rates keep rising, paid back with higher and higher interest charges upon refinancing. Of course house prices will decline as demand drops off due to higher interest rates. If they decline too far there will be a significant increase in mortgage defaults. Banks will slide as they increase provisioning to cover debt default write-offs. Their stock prices will take a bug hit.

  • David 9 months ago

    A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.

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