Canada Global

Toronto and Vancouver Real Estate Is Now Much Less Affordable Than LA, New York

Think Toronto or Vancouver real estate is too expensive? Then consider more affordable places like Los Angeles, New York, or San Francisco. Oxford Economics released its North American Housing Affordability Index (HAI) for Q2 2021. The global forecasting firm found affordability has deteriorated across North America. Toronto and Vancouver real estate were in a league of their own though. The cities are now less affordable than traditional expensive global power cities, like Los Angeles and New York.

The Housing Affordability Index

The HAI measures the cost of carrying a home, in contrast to the borrowing capacity of a median household. It uses a point system, where higher numbers mean less affordable, and 1.0 means the full budget. An index of 1.0 means a home costs the maximum budget a median household can afford. If it’s 0.75, the household’s maximum budget is 25% higher. Similarly, an index of 1.25 means a median household needs 25% more than they earn to afford a home. Each city’s score is based on regional incomes.

At first glance, a 1.0 score might seem ideal. However, the more a household spends on housing, the less they have to spend on other areas of the economy. This results in slower economic growth at the expense of real estate. If a region isn’t a luxury region like Monaco, it might have a tough time keeping younger people. Not an issue for wealthy regions with a well-managed tax base. A huge problem for regions dependent on younger people to carry the tax base.  

Housing Affordability Fell Across North America

In general, housing affordability fell across English-speaking North America. The US saw its index rise to 0.77 in Q2 2021, up 3 basis points (bps) from the previous quarter. In other words, the cost of housing was 23% lower than the maximum local incomes could support. An obvious culprit here is home prices rising much faster than incomes. Less obvious is mortgage costs creeping back up to higher and more natural rates.

Canadian real estate affordability deteriorated much faster, and started in a worse place. Canada’s index reached 1.35 in Q2 2021, up 5 bps from the previous quarter. Housing costs are 35% higher than the typical household can afford, and are projected to get worse. Not due to rising home prices, which the firm sees hitting a plateau soon. Affordability is set to deteriorate as rates begin to normalize from stimulus-driven levels. Rising rates also tend to push prices lower though, so we’ll see how this goes.

Vancouver Real Estate Is The Least Affordable In North America

Vancouver is once again the king of unaffordable real estate in North America. The index for the City reached 1.71 in Q2 2021, up 3.4 bps from the previous quarter. A median household needs 71% more income than they make to carry homes at these prices. The firm sees rising mortgage rates adding another 6 bps to the index by the end of next year. Good for Vancouver. It needed the win after losing the top spot on the UBS Global Bubble Index.  

Toronto Real Estate Is The Third Least Affordable City

Toronto real estate came in third — more affordable than Vancouver, but less than New York City. The city’s index reached 1.56 in Q2 2021, up 3 bps from the previous quarter. The analysts see the index rising another 9.6 bps by the end of next year. A median household needs 56% more income than they make, and that’s going to hit 65.5% by next year.

Toronto recently claimed the spot of the second largest bubble in the world. A real accomplishment, considering it wasn’t considered a bubble city just 5 years ago. That’s some exuberant home price growth. 

Los Angeles Real Estate Is The 8th Worst Market For Affordability

Los Angeles real estate came in 8th, looking like a deal in contrast to Vancouver. The city fell to 1.45 in Q2 2021, up 2.7 bps from the previous quarter. It’s forecast to rise another 4.7 bps by the end of next year, still more affordable than Toronto is today. 

Ottawa Real Estate Is The 9th Worst Market For Affordability

Canada managed to squeeze in another real estate market with dwindling affordability — Ottawa. The index reached 1.39 in Q2 2021, up 2.1 bps from the previous quarter. Already 39% more expensive than the median family can afford, the firm expects a whopping 17.2 bps climb by next year. That would put Ottawa at Toronto’s affordability level today. Canadian politicians will totally do something, they just need to check the price of their home first.

Montreal Real Estate Is Equally Affordable To Miami, NYC, and Seattle

Montreal real estate used to be known as a place with cheap housing — but you might as well move to NYC at this point. Montreal, Miami, and New York City (NYC) all ranked 1.04 on the index in Q2 2021. Seattle, which is undergoing a notorious housing crisis, was just a hair higher at 1.07. The forecast has Montreal becoming more expensive than NYC on a relative basis by next year. Which makes sense, since Greater NYC’s GDP is the size of Canada’s whole GDP, but Montreal has better bagels. Checkmate. 

North American real estate prices are rising at a rapid rate, and it doesn’t matter where — prices are soaring. Boise real estate is now the second least affordable market in North America, if you can believe it. This isn’t a result of fundamentals by any measure, it’s an intended consequence of policy decisions. 

There’s no other way to read the flood of mortgage liquidity at a time when home sales were at record highs. The resulting inflation is now trickling into other areas of the economy. This will push rates higher, regardless of whether economies are ready or not. If rising rates don’t trigger a correction, affordability deteriorates further.

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11 Comments

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  • RW 1 month ago

    This is what I’ve been trying to tell people this whole time. It’s not that Canadian real estate is expensive, it’s that foreign incomes are the only ones that can afford this. You can’t grow up in a major Canadian city and think you’re going to own a home. Fewer than 10% will actually be able to do it going forward.

    • J Smith 1 month ago

      I am in Canada, and I found that when I left the major city the percentage increases to nearly 100%.
      Relocated from Victoria, BC to Yukon Territory in 2013, and now I have land and a home and all achieved with a 40-50hr week job. Maybe move to greener pastures eh!

  • Mica 1 month ago

    I moved to Miami in 2020, right when the pandemic first started and I realized I’d prefer to be isolated somewhere warm. The lifestyle in Vancouver isn’t even close to comparable, and the cost of a house is maybe 20%. Loved my Vancouver place, but pocketing 80% of the sale and paying for a house in full out here was probably the smartest decision I’ve ever made.

  • Ali 1 month ago

    Warnings, warnings, warnings, NOBODY SAW THIS COMING.

    • Jin 1 month ago

      A lot of whistle-blowers in the US when this was happening as well, but they were ignored. Place your bets and become a legend. If people won’t listen, you should be positioned to make bank on this.

  • Daniel Ko 1 month ago

    I’ve been watching Canadian real estate for a few years now, and it’s absolutely insane to watch people go this crazy. I remember 2006 really well, and it was nothing like this. Only idiots back then thought home prices could never fall, but EVERYONE in Canada thinks they’ll go up forever.

    • Shane-O-Mac 1 month ago

      Either way – “the last one in is holding the bag.”
      My wife and I live downtown TO and have rented for years (same place – thankfully still reasonable rent) watching this insane bubble grow exponentially over the years.
      We have saved like squirrels and have kept our $400k powder dry in this craziness.
      I have told her we will jump into buying when “this thing” comes crashing down – and the Gov’t and the pandemic money has just kept it going… but not for much longer.
      And if these stats BD quoted are true to form, we will have the pick of the litter of properties to choose from on severe discount in a matter of months – not just from the recent buyers in the pricing bubble – but the investors who thought it wise to buy in at the same time.
      As Rumi once said –

      “Greed makes man blind and foolish – and makes him an easy prey to death.”

      • answer guy 1 month ago

        we’ve also saved a ton but are running out of time to wait as we have 2 kids now…

        basically accepted the fact that we’ll lose money, but we’re not betting the farm either.

        I’ll say this though – the crash will take years to bottom, not months

  • Brian 1 month ago

    Isn’t it great? Can we now say Toronto/Vancouver are better than LA/NY?

    Hooray!

  • D 1 month ago

    $10 million median home price in Toronto is what they want. And minimum wage will still be below $20.

    • Ike 1 month ago

      Wouldn’t it be nice to get a house in Toronto with minimum wage work

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