Canada vs. USA: Which Housing Market Has It Worse?

Buying a home or finding a rental you can afford is becoming more of a challenge both in Canada and the U.S. Compared to ten years ago, securing shelter is increasingly more financially burdening north and south of the border.

But are housing costs more overwhelming in Canada or in America? After both countries experienced their own share of economic troubles, where are their housing markets heading now and what does that mean for the average American and the average Canadian looking for a home?

To compare the evolution of the two housing markets and to assess their current status, our analysts extracted historical data on market trends and examined numbers from 2008 and 2018. They looked at key metrics including average home price, rent, homeownership rates, changes in the countries’ median incomes, and the countries’ evolution on the affordability scale for a side-by-side comparison.

Here are the main findings:

• The average Canadian has to dish out a whopping 56% more to buy a home, or 25% more to rent one compared to ten years ago, but the median wage in Canada only went up 15%.
• The average home price in the U.S. increased at a much slower rate (24%), while the median income went up by 18%.
• Since 2008, the Canadian dollar lost approximately 25% of its power compared to the American dollar, going from almost perfect parity to a much lower exchange rate.
• The affordability crisis worsened in Canada, where the housing market went from “seriously unaffordable” to “severely unaffordable”, but the American housing market remained in the “seriously unaffordable” category.

Canada vs. USA: Two World Leaders at a Crossroads

Eight years into the new millennium, the U.S. marched head first into one of the worst economic crises in its history following the bursting of the housing bubble. Canada’s real estate bubble hasn’t yet popped and the country has not yet seen a major decline in home prices, but the Canadian economy experienced its own share of turbulence following the oil price crash from 2014 and the burst of China’s speculative bubble.

And now, 10 years after the housing crisis that destabilized the U.S., some analysts claim that Canada faces a similar scenario if it stays the course: household debt currently exceeds 100% of GDP, according to data released by the Bank for International Settlements, the average home price went up 56% in ten years, while the median wage per household only increased 15% during the same period, and loose lending is on the rise.

In the past six years, the Canadian dollar has lost 25% of its power compared to the American dollar, going from almost perfect 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.

Homeownership Rates in Canada Fall after 50 Years of Sustained Growth

Research on homeownership reveals the extensive economic, social, and psychological benefits associated with owning a home. And although it is the Americans who consider homeownership an integral part of the American Dream, Canadians have equally strong aspirations of homeowners, as well as higher ownership rates.

In the U.S., homeownership rates reached a peak towards the end of 2004, when the percentage of homeowners settled at 69.2%, only to start decreasing in 2007. By 2015, the share of homeowners in the U.S. fell to 62.9%, 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 pegged at 64.2%.

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

Home Prices in Canada Increased Twice as Fast as in the US

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 a staggering 56% jump since 2008, Canada’s average home price went from $304,663 CAD to $475,591 CAD in just ten years.

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

The alternative to homeownership, renting has been on the rise in both Canada and the U.S. in the past decade. And so has the average rent in both countries. In Canada, the average amount went up 25% in ten years, and the U.S. had a similar trajectory, posting a 23% increase since 2008. However, all cities are not created equal.

According to RENTCafé.com, average rents in New York and San Francisco are way ahead of all the other American urban centres: in Manhattan, renters pay $4,119 USD, and even in Brooklyn, they face average rents of $2,801 USD. Four other cities post average rents above $3,000 USD: San Francisco, CA ($3,590 USD), Boston, MA ($3,379 USD), San Mateo, CA ($3,234 USD), and Cambridge, MA ($3,112 USD).

In Canada, it is Vancouver and especially Toronto that boast the highest rents, but they are well below the highest rental rates in the U.S. – in both cities, the average rent hovers around $2,000 CAD. And Vancouver doesn’t show any signs of slowing down: the provincial government agreed to a 4.5% maximum allowable rent increase for 2019, which is the largest rent increase since 2004 when the ceiling was set at 4.6%.

Increase in Income No Match for Home Price Growth in Canada

Although incomes also rose in Canada over the past decade, they were easily outpaced by growth in home prices. The average Canadian is currently looking at home prices 56% higher but has an income only 15% larger.

Compare that to the situation in the U.S., where the median income per household increased by 18%, while home prices went up by 24%.

So while it’s true that average home prices and rents are increasing faster than wages in both countries, Canadians are at a clear disadvantage.

In Several Canadian Markets, Unaffordability Nightmare Looms Large

Closely linked to the median wage issue, housing affordability has a major impact on standard of living. And looking at the evolution of the Median Multiple – the median house price divided by the median household income – in the U.S. and Canada’s largest cities, it is the Canadians’ standard of living that is hit the hardest.

While in 2008 the national unaffordability ratio in Canada was pegged at 4.9, which placed the country in the “seriously unaffordable” category, in 2018 it climbed to 6.7, which is far into the “severely unaffordable” end of the spectrum. As RBC‘s latest report also points out, “Canadian housing affordability is now at its worst level since 1990.”

The U.S., on the other hand, remained in the “seriously unaffordable” category, going from a ratio of 4.7 in 2008 to 4.9 in 2018.

According to a previous Point2 Homes study, housing affordability varies wildly in Canada and the U.S., from province to province and state to state, but it’s mostly individual markets in both countries that are pushing these rates higher and higher.

So what are the main markets that are making such an impact on national affordability, forcing owners with a mortgage and renters to spend more and more of their income just to cover housing costs? Vancouver, BC comes first, with a staggering 17.3 on the affordability scale, followed by Manhattan, NY with 15.6. San Francisco, Los Angeles, and Boston all scored 10 and above; Canada doesn’t have any other markets in the top 10, although the Toronto and Mississauga housing markets come in at No. 13 and 14.

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.

Currently, there is a healthy debate between bullish market analysts, who claim that all is well in Canadian residential real estate, and the bearish prognosticators, who see a storm on the horizon. The optimists point to a solid 2% increase in GDP for 2018 and increased sales activity after a fairly soft spring market. Some bulls also say that the rising popularity of condominiums and other multi-family dwellings in Canada, especially by immigrant buyers, will act as a cushion for the tight housing market.

However, the pessimists emphasize five important factors suggesting that Canadian home prices probably face a decline in the years ahead: high housing price-to-income ratios, rising interest rates, 5-year balloon payments and adjustable rate mortgages, suppressed economic activity in the U.S., China, and Canada due to tariffs, and sky-high valuations in some of Canada’s most expensive urban centers. 

While the future direction of Canada’s housing market is difficult to forecast, there is no doubt that both homebuyers and renters north of the border face tighter conditions than their neighbours to the south.

Check out the full infographic here.

Expert Insights

For an expert view about the post-recession evolution of the real estate markets in Canada and U.S., we talked to Wimal Rankaduwa, Macroeconomics Professor at Prince Edward Island University. Read his interview below to discover some of the reasons for the significant difference between the evolution of the average home price and the median income per household in Canada, as well as some practical steps to minimize this difference:

In the past 10 years, in Canada average home prices went up by 56% while the median income increased only by 15%. What are the main reasons accounting for the significant difference between the evolution of the average home price and the median income per household in Canada? Could this difference bring the homeownership rate down even more, in the near future?

The research has shown that the escalation of home prices during this period has been a consequence of the persistent gap between the demand for and supply of housing, particularly in several major metropolitan areas. The gap has resulted from the faster growth of demand relative to the supply of housing in these metropolitan areas. Household income is only one among several major factors responsible for higher demand and prices in the housing market. As the growth rates indicate, the increase in household income alone cannot fully explain the increase in demand or the escalation of prices of housing during this period. This highlights the fact that there are other factors more important in explaining the behavior of housing prices. In fact, researchers have found several other factors responsible for higher prices such as the growth of employment opportunities, population growth, relatively low or favorable mortgage rates, and future expectations of the housing market behavior. The demand from non-residents and wealthy immigrants has also been found to be increasingly important in driving prices higher in some metropolitan areas over this period. The variations observed in the movements of prices across housing markets also highlight the importance of regional or local market conditions other than median income.

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. 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. This may also encourage savings but the household savings rate, which is currently very low, may not alter significantly in the short run. However, this can also have a negative impact on the supply of housing as well. So, it is highly unlikely that the gap between demand and supply and housing prices will fall significantly in the short run. It is also highly unlikely that the affordability on the part of households will improve significantly. Therefore, a significant improvement in the homeownership rate is not possible in the near future, and it will probably continue to fall.

What do you think are some practical steps that need to be taken to minimize the difference between the average home price increase and the median income increase?

Raising median household income and providing affordable housing both can be considered long-term economic goals. However, arresting the escalation of house prices may be possible in the medium term. This requires the understanding that the national averages mask regional variations and reflects largely the experience of several metropolitan areas where house prices have drastically increased over a short period of time. Several area-specific factors such as “house flipping”, higher demand for housing by non-residents, and the existing rules and restrictions on land use that limit the potential for increases in the supply of housing have been found to be responsible for drastic price hikes in those housing markets. To be effective, any policy tool or strategies to arrest the escalation of house prices must focus on those factors. So, minimizing the difference must be tackled at both national and regional levels.

Methodology

• For this study, we looked at key metrics, such as average home price, average rent, homeownership rates, median income per household, average hourly salary, and housing affordability, comparing numbers from 2008 to values in 2018.
• Other important sources include: Forbes, Financial Times, CBS News, DailyHive, RBC, Demographia.