Canada’s Housing Woes Reminiscent of U.S. in 2008

Canada’s Housing Woes Reminiscent of U.S. in 2008

Homes may be unaffordable in the United States, but the situation is even worse in Canada. So says Point2 Homes in an analysis comparing the two countries’ recoveries in the years since the Great Recession.

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In the past 10 years, average Canadian home prices went up by 56 percent while the median income increased only by 15 percent. The average home price in the U.S. increased at a much slower rate (24 percent), while the median income went up by 18 percent.

One economist says the escalation in Canadian home prices is a consequence of the persistent gap between the demand for and supply of housing, but also cites the growth of employment opportunities, population growth, relatively low or favorable mortgage rates, and future expectations of the housing market behavior.

“The median household income cannot be expected to increase substantially in the near future, but the housing market can be more sensitive to information and future expectations,” says Wimal Rankaduwa, macroeconomics professor at University of Prince Edward Island in Canada.  “There is an expectation of an interest rate hike in the very near future, which will have a negative impact on the demand for housing.”

While the U.S. housing bubble burst in 2008, Canada’s real estate bubble hasn’t yet popped and the country has not yet seen a major decline in home prices. However, the Canadian economy experienced its own share of turbulence following the oil price crash in 2014 and the burst of China’s speculative bubble.

And now, 10 years after the housing crisis that destabilized the United States, some analysts claim that Canada faces a similar scenario if it stays the course: Household debt currently exceeds 100 percent of GDP, according to data released by the Bank for International Settlements.

What’s more, in the past six years, the Canadian dollar has lost 25 percent of its power compared to the American dollar, going from near-parity to a much lower exchange rate. Therefore, in this study, the median wages, the average home prices, and average rents in both countries are expressed in the respective country’s currency, to avoid distortions and inaccuracies in percentage changes.

Comparing the two nations’ homeownership rates reveals some interesting findings.

In the U.S., homeownership rates peaked in late 2004, when the percentage of homeowners reached 69.2 percent, and began decreasing in 2007. By 2015, the share of homeowners in the U.S. fell to 62.9 percent, a level that hasn’t been seen since 1965, when data gathering was just starting. After three years of recovery, the share of homeowners in the U.S. is currently 64.2 percent.

In Canada, homeownership rates rose at a steady pace for more than four decades, hitting an all-time high of 69 percent in 2011, but that percentage went down to 67.8 percent following the economic downturn from 2014. This is the first time the share of homeowners declined in Canada in almost half a century.

And with average home prices rising at an alarming pace north of the border, it is no wonder the average Canadian can no longer easily commit to a mortgage. Due to the 56 percent jump since 2008, Canada’s average home price went from $304,663 CAD to $475,591 CAD in just 10 years.

The U.S. market’s increases have been more contained: after a 24 percent increase, the average home price went from $245,200 USD in 2008 to $303,200 USD in 2018.

Given the significant discrepancy between the evolution of home prices and wages, Canadians might be headed for a rough ride. There are many other factors, including an increase in subprime lending, that suggest the Canadian housing market may be following the same path Americans did a few years back.

Real Housing Prices USA vs. Canada

Download the full infographic.

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After earning her bachelor’s degree in journalism at the University of Central Florida, Tracey set out in the real world at Florida Realtors in 1994 as a communication assistant, working her way up to editor in chief of Florida Realtor magazine. In 2004, she left the association to start her freelance writing and editing business. One of her first clients was REAL Trends, and she started working for the organization in 2005. In 2014, Tracey was promoted to editor in chief of publications for REAL Trends. She handles the writing and editing of all REAL Trends publications and marketing materials, including LORE Magazine, the REAL Trends newsletter and the blog. She is also the primary podcast interviewer where she conducts interviews with top real estate industry leaders and affiliated industry leaders. Tracey is married with two children.

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