Flat Canadian Real Estate Prices While Incomes Catch Up? Nope

Flat Canadian Real Estate Prices While Incomes Catch Up? Nope

Canadian real estate prices made huge climbs, and experts are saying incomes will catch up. This week one of our founders was invited by a government organization to talk about the Future of Home Prices. In typical Better Dwelling style, he started with  debunking a common statement, “home prices will stay flat, and incomes will catch up.” I’ve been tasked to run the numbers across Canada, to see if that statement is equally outlandish in other markets, and boy is it ever.

3x Your Income? That’s Not A Thing

It’s often said that a home should cost 2-3x your income, to stay within the general guidelines of affordability. While that may be the smart thing to do, it’s rarely observed. Some rural markets can get away with that, but cities like Toronto and Vancouver aren’t doing this and haven’t done so for a long time.

If you didn’t see our founder’s presentation at the CMHC Housing Finance conference, or read yesterday’s article – read it now. For those that don’t have time, he argues that people adopt higher levels of payments in what I call a push-pull method. These levels do go down, but in modern real estate finance history, they continue to rise with a number of mean line – style regressions. If that was too complicated, and wordy – people start thinking homes are a deal at a certain level providing something called “support.”

That level is starting to look like a standard 28-30% in North America residential markets. Although there are a number of cities that continue to see prices decline beyond that support. These exception are usually related to a significant loss of a primary industry. Detroit’s decline and automation of car manufacturing is a good example of this.

Interest Rates For Idiots That Think They Understand Interest Rates

Interest rates are being blamed for high home prices, but this isn’t as big of a contributor as most people think. While it does impact the number of people that can afford to pay higher, it doesn’t always do that. Interest rates impact the majority of Canada, not all markets had stratospheric climbs.

For example, Vancouver is now more expensive than New York City – a city that’s much more dense with similar land restrictions. It’s even cheaper in New York to service a mortgage, and you can lock in a fixed rate for the full 30 years. However, they’re not chasing new developments in the way locals are. Don’t get me wrong. Low interest rates make it possible for people to borrow more, facilitating more bids and higher pressure on inventory. But the desire to own, and the belief that this debt is worth servicing plays a much greater role. In this case, buyer and seller expectations set the bar.

Prices Will Be Flat, Incomes Will Catch Up.. Is Not A Thing Either

Now, if you’ve read yesterdays article – you’ll know how absurd it is when people claim that home prices will stay flat. I won’t repeat the author’s statements, but I will demonstrate how long it would take in some significant markets for this to happen. If home prices stayed flat, and incomes grew at the median rate of the previous 10 years – here’s how long it would take for incomes to hit the support.

Canada Would Take 32 Years

If the typical home price stayed flat, and incomes continued to rise at a similar rate to today – we would hit the support in 32 years. As Stephen has said, if you heard an analyst say Canadian home prices will stay flat and incomes will rise, they probably didn’t run any numbers. They just wanted to fire off a press release to help build up their profile, which the media usually noms up. If they actually did run numbers, they’re saying you can buy a home in 32 years for the same price today. I’m not bullish on home prices here, but I’m not nearly that bearish either.

Source: CREA, BoC, Statistics Canada, Better Dwelling. Author’s calculations.

Toronto Would Take 41 Years

Yeah, it’s pretty wacky. It would take 41 years for the ratio to hit support, which is the longest in Canada. Once again, we have a more comprehensive write up on Toronto, so check that out if you’re looking for more on it.

Do experts think people buying today, will have finished paying their mortgage for 11 years before prices rise? Probably not, especially not in Toronto. Unless you have a short thesis on the country’s economic engine you haven’t yet presented?

Vancouver Would Take 22 Years

This one was surprising to me, but Vancouver residents are more willing to accept a higher ratio. If home prices stayed flat, and incomes rise at a similar rate to how they’re moving – they would hit support in 2039 – 22 years.

Although Vancouver’s market mechanics do have a particular flaw since you know… low income folks are snatching up multi-million dollar mansions. But, this is how long it would take using the official government numbers, and this out of whack ratio.

Source: CREA, BoC, Statistics Canada, Better Dwelling. Author’s calculations.

Victoria Would Take 31 Years

Victoria’s market has been running very quickly since locals convinced themselves they’re the next Vancouver (they’re not). To the point where the home price to income ratios rose a massive 32% in under 2 years. If home prices now stalled and waited for incomes to catch up, they would hit support in 2048 – 31 years from today.

Source: CREA, BoC, Statistics Canada, Better Dwelling. Author’s calculations.

Markets Not Looking Toppy

There are some markets that don’t look like they’re at the top. If they were however, and waited for incomes to catch up – here’s what it would look like.

Calgary Would Take 31 Years

Calgary is interesting, since they have some of the highest incomes in the country, and reasonable home prices. The ratio is only 3.98, so I don’t think it’s really the top – but if it were, incomes would catch up to support in 2048 – 31 years later.

Source: CREA, BoC, Statistics Canada, Better Dwelling. Author’s calculations.

Montreal Would Take 29 Years

If Montrealers don’t get bluffed into thinking they should be paying more for homes, the ratio would top out at 4.03. If home prices go flat from here, and incomes continue to rise at a similar rate to today, the ratio would hit support in 2046 – 29 years later.

Source: CREA, BoC, Statistics Canada, Better Dwelling. Author’s calculations.

This Was Not A Forecast

Yes, we have residential real estate forecasting algorithms at Better Dwelling. No, this was not based on any of them. It was simply meant to highlight that the probability of home prices staying flat, while incomes catch up has little to no logic to it. In no way does anything I’ve said explain what would happen, we’re just ruling out one possibility. Now that this has been ruled out, time to look at other more likely scenarios. Those are home prices drop, we ramp up the use of land banking, we become a nation of high priced landlords, or incomes make stratospheric climbs soon.

So which one do you think is coming up? Leave your thoughts below.

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  • Party on 7 years ago

    The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.

    Canadian total (household, business, and all levels of government) debt numbers as of the end of June, 2017


    • Beh G. 7 years ago

      Are the numbers in that blog post accurate?! We accumulated more than $2.80 in debt for every $1.00 we generated in growth in the last year?!

      Assuming, there was some capital behind this and all of the growth wasn’t just created with debt, these numbers are pretty scary. Of course, it would be nice to see how much wealth was created during this period as well for every $1.00 in growth.

  • himanshu shah 7 years ago

    Dear SIr,

    Why different cities have different support level. from 2.9 to around 8? that’s a big support level difference.


    • Ham 7 years ago

      Support level discussed in earlier article is defined at 28-38% lower than the peak price to income ratio. The y axis in these graphs are price to income ratio.

  • Leo 7 years ago

    How did you determine the level of support? That seems to be a critical assumption you didn’t explain.

    • Ham 7 years ago

      Based on the statistical learning on North American realestate price history as discussed in previous article.

      • Leo 7 years ago

        > Based on the statistical learning on North American realestate price history as discussed in previous article.

        Which was never justified in any way other than “we say it is so”.

        • Jon 7 years ago

          Either way there is no evidence of support-levels staying at 7-8x income to live in a distance suburb outside of the GTA.

          Build more houses. I feel like this is Russia. Where is the private sector and the mantra “higher prices will lead to lower prices” which is always true in capitalism. The fact that this hasn’t resulted in excess supply shows how brutal the Canadian economy is and why it’s a poor place to invest cash.

  • bluetheimpala 7 years ago

    Won’t the prices keep appreciating, albeit at a much slower pace, until the boomers are all done reaping their bounty? Seems like a repeating cycle until the current equity, that has grown over the last 30 years, is fully rundown. 65 year old parents in Toronto. Bought house in 80s @ bazzillion % for $80,000. Paid it off and they now have an asset worth $900,000 as real estate climbs. Suck out $200-400K for the kiddies, move outside of the city for $400K or into a condo or get into a rental and then $100K left over. Assuming they have some sort of a pension or work for a few more years (which is the reality these days).
    I see the pain being delayed for 5-10 years with the worst reserved for peripheral suburbs and rural burbs…they may burn to the ground unless the demand for Walmart + Turtle Jacks increase exponentially.

  • Paul Q 7 years ago

    Excellent articles the past couple of days. I look forward to checking this site every morning.
    One thing that would be really interesting is a rough calculation of when mortgages will no longer be able to grow, according to wage growth. There must be a point in time at which an average Canadian household is no longer able to borrow enough for an average home due to limits on mortgage length. Or at which point the average-earning Canadian can no longer borrow enough in a lifetime to pay off a house. If my wording makes sense…

  • Anne Hamilton 7 years ago

    To dig in a little more, what would the stats look like if you were to do the following:
    – remove the top 1% (or 5%) of income earners who skew the stats for the rest of us
    – or remove the top 1% (or 5%) priciest houses from the stats

    This might give us a better view of what the mean and time taken to revert to the mean would be for the vast majority of home-buyers…


    • Bay Street Guy 7 years ago

      One of the problems anyone would have with the top 1% of earners are those with extremely high amounts of income are likely to minimize their incomes on paper for tax purposes/use estates/offshore diversification strategies. It’s extremely difficult to peg who they are, in the same way that it’s extremely difficult to peg who are *really* low income and likely would never be a buyer.

      On the upside, since most real estate depends on upward mobility – it doesn’t matter. If renters can’t afford to upgrade, starter homes can’t upgrade to mid-level. If they can’t upgrade to mid-level, they won’t be able to buy a luxury unit. This gets even worse when you realize that discounting comes out of the majority of people’s net worth. I get a mini-panic attack just thinking about it.

      This has been a big issue we’ve been discussing in finance circles for a while. Will Demand for housing will continue to increase from immigration, but not at the rate that would support prices continuing to expand. If you sold your home at a huge profit, consider yourself lucky. Over the next 10 years, good luck.

      This also has social consequences. Unless renting has the stigma removed, people won’t feel secure. If they don’t feel secure, they won’t have kids. At which point immigration needs to ramp up. We don’t want broke immigrants, we want the wealthy ones… ask someone from Vancouver how that works out.

      • Beh G. 7 years ago

        As always, a pleasure reading your posts Bay Street Guy. 🙂

  • Fiendish Thingy 7 years ago

    Canadians are about to lose 20% of their borrowing power through new OFSI lending rules, and you think prices will continue to rise?

    (I’m sure you’ll delete this like my other replies, as you don’t seem to like readers with critical thinking skills that question the status quo).

  • willy 7 years ago

    What do you mean by support? Support for what? What’s this 28% or 30%? Is it possible to clarify and give an example?

    • BB 7 years ago

      LOL … read the previous article. It’s based on North American real estate price history.

  • Alex 7 years ago

    All respect, but if you are saying that interest rates don’t make a difference, do me a favour and redo your article/graphs with only one small difference: instead of looking at home price look at monthly mortgage payment (per month) and instead of yearly income look at monthly income. You can still say the ratio between monthly mortgage payments and monthly income should be 1 to 3 for status quo…. Assume same interest rate as today and then run multiple scanarios with increasing or decreasing interest rates in future…
    Would be interested to see the graph…

  • Hank Peters 6 years ago

    I’m 100% sure interests rates make all the difference in the world.

  • Amanda Noble 6 years ago

    Thanks for this valuable information. I am researching a lot on this topic.

  • Henry Collins 6 years ago

    It is interesting how data analysis can present conclusions we never thought of. Thanks for sharing this information.

Comments are closed.