Canada’s Housing Issue
In recent years, it has not gone unnoticed that Canada’s housing prices have run rampant. More and more people are struggling to afford a house in this market.
There are many interesting statistics and factors that explain why Canadians have been struggling to afford housing in recent years. These include the debt-to-income ratio, foreign buyers, and Population density, and many more.
Firstly, let’s take a look at the Canadian debt-to-income ratio. According to Trading Economics, the debt-to-income ratio is at 180% or 1.8x the average household income. This means that households have 1.8x their income in debt. These could possibly include mortgages, which means that, yes, they do own houses, but does it make financial sense to own a house when it puts you in that much debt? The average income in Canada is around $70,000 a year, which means that the average person in Canada would have 126,000 in debt to pay off at the debt-to-income ratio of 180%. Remember, however, that the average does not always represent a data set completely accurately. There will be people with no debt bringing that number down and people with many times their income in debt bringing that number way up. To get a true representation, we would need to look at removing the outliers from the data. An outlier is defined as values that are ±3 standard deviations from the average. This would mean that people with no debt would not be included in the calculations for the average and provide a more accurate representation of the debt-to-income ratio, and maybe then the ratio would look less alarming.
So, how does this tie into Canadians not being able to afford to purchase a home? If taking out a mortgage for a home will put Canadians in debt they would refrain from doing so, rather, they may want to rent. Even though that in itself is very expensive it does not put them into debt like a mortgage would.
We must also look at where most of Canada’s population lives because this will affect housing prices. Toronto, Montreal, and Vancouver account for 31% of the population in Canada. If you look at the average price of housing in these three cities, it will be much more expensive than that of the average house price in Canada, and it is. The average house price in the Greater Toronto Area (GTA) is $1M, while the average house price in Canada is $750,000. House prices in the GTA are 33% greater than the average in Canada. What about Vancouver? The average house price there is $1.2M. Both cities have average prices well above that of the rest of Canada. Having such a low average for all of Canada can skew the perception of buyers in the market as it gives them the impression that housing is cheaper than it is when, in reality, the most desirable places to live in Canada have housing prices that are way above the average for the country.
The reality is that Canadians’ income has not been able to keep up with the housing market. While it may not be on the mind of the younger generation, they may not be able to ever buy a house. It is recommended to allot 32% of your income to housing costs such as a mortgage. With some calculations, it shows that, for a person to afford the average house comfortably, they would need to be making $156,250 per year. The top 10% of earners in Canada made a little over $100,000 per year. It is concerning that not even the top 10% of earners in Canada can afford the average home.
There is also the topic of foreign internationals. there are many foreign internationals purchasing property in Canada and driving up the home prices for Canadians. This is not to say that this doesn’t have a positive effect on the economy. It stimulates growth in Canada’s economy by providing an injection of cash. Vancouver is a prime example of this, with lots of foreign internationals purchasing property, their average home price is at $1.2m, while the average in Canada is $750,000. To try and combat this, the Canadian government implemented a foreign buyers ban. This prevents non — Canadians from purchasing residential property.
EE scoop: we think Canada’s government needs to implement more rules, such as the foreign buyer ban. The aim of those types of policies is to lower the price of houses. The issue, however, like with any other policy implemented, is unintended consequences. Something else may happen that was not meant to happen when the government implements new policies. In theory, these policies should work to drive down the cost of housing in Canada and provide Canadians with a healthier housing market. We think that the outlook of the housing market in Canada is grim, and in the future, it will be very difficult for the new generation of Canadians to afford housing in their own country. Many people move to Canada as it is a place of opportunity, however, the prospect of not being able to afford a house is not a good attractor for people looking to move there.
It is not just Canada’s housing that is an issue. Canada is falling behind on standard of living indexes like GDP per capita. Some may be inclined to say that this is due to Canada’s large growth in population due to immigration, but it cannot be ignored that Canada has had persistent productivity issues that affect their GDP per capita. Canada has great opportunities for many people, but many indicators show that the standard of living is decreasing, the cost of living increasing, income lagging behind housing prices, and exports slowing down. That’s a lot of things that do not show a positive outlook for Canada’s future. People’s dissatisfaction comes not only from their inability to purchase a home but also from many of the factors mentioned above. We can only wait and see what the government implements to try and control and fix these problems and how the markets will react in their unpredictable ways.
