Canada housing: “Math that doesn’t add up”

By Leith van Onselen

For several years now, I have been a passive observer of the Canadian economy and housing market, which has some striking similarities to Australia.

Both economies are commodity exporters. Both countries have experienced high rates of immigration. Both countries largely dodged the global recession that shocked the developed world. Both countries use the Westminster system of Government. Both are said to have world-beating banking systems. And both nations have amongst the developed world’s most expensive housing, when measured and against incomes and rents.

With these factors in mind, it was interesting to watch the above video from The Globe and Mail examining Canadian housing affordability, where “the math doesn’t add up”.

According to the report, housing affordability has gotten so bad in Canada that it now takes around 90% of median pre-tax income to own a house in Vancouver and around 60% in Toronto, meaning that median income earners are effectively shut-out of all but the condo market, which is still unaffordable (see below table).

ScreenHunter_9858 Oct. 21 09.22

The Canadian mortgage broker featured on the video also notes that she is receiving “more and more” calls from recent buyers that cannot afford their mortgage payments and are seeking to refinance, but cannot do so because they have insufficient equity.

The mortgage broker also notes that she “truly believes that people will be in trouble” once interest rates normalise:

“Because once the interest rate go up, people will not be buying and that’s going to slow down the market, and then the equity is not going to be there. When interest rates go up, payments go up, and people will start losing their homes. That’s the reality that we have to expect”.

It kind of reminds me of when On-the-Houses’ (Residex’s) analyst, Eliza Owen, described affordability in Sydney as “a tad ridiculous”, in that “if the median household in Sydney were to purchase the median value house, they would be spending over 90% of their net income”, with Melbourne not much better  (see below table).

ScreenHunter_7471 May. 28 07.51

Substitute Vancouver for Sydney and Toronto for Melbourne, and the parallels are uncanny.

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Unconventional Economist
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  1. Wow! How refreshing to have an interview of substance, including from the CEO of the mortgage brokering company! Very watchable.

  2. And why is Vancouver so much ahead on the upward spiral than its much bigger sisters Toronto and Montreal (look at metro populations)? Er, Chinese investors anyone?

    • Overall … the New Zealand and Australian housing markets are more inflated than those in Canada.

      Check out the Demographia Housing Surveys … and too … the total value of housing stock to GDP raio.

  3. Here’s an interesting question for you:

    You are speaking to a group of young people (15yrs old, year 10) and they ask for career and life advice. Would you tell them “get a normal job and buy a normal house and things should work out well for you”?
    At today’s prices that is not practical. So what do you tell them?

    • Learn to code embedded micro systems, robotics or web.

      Also be practical. know how to build a house, shoot things, farm food, survive.

    • Screw Education and Student debt, go out and start a business and fail early and learn. Do it over and over and over until you make it, because you won’t be able to own your own home if you get a regular job.

    • Get a portable skill, stay mobile and debt free, follow and earn strong currencies around the world and invest the proceeds in international assets that are supported by fundamentals. Stay flexible enough to follow things as they change instead of having a mortgage make the decisions for you in life . Then when you are ready retire in your home country on a steady, solid, non-speculative investment income and work just to have a bit of fun:)

  4. three striking things:
    1. average wages in Sydney are not much larger than those in Vancouver and Toronto ($62k in Sydney vs. ~$50k in Toronto), yet home prices are much more expensive in Sydney $850k vs $560k in Toronto plus interest rates are much higher in Australia (4% in Australia vs 2% in Canada).
    2. How it’s than possible to need 90% of an average wage income to buy home in Toronto but less than that in Sydney
    3. Units are much more affordable in Canada (less than half the prices of houses), so young can at least afford some home, as opposed to Sydney and the rest of Australia where units are only 30% cheaper than houses.

    • wasabinatorMEMBER

      Yeah, I have always found it absurd how a box of air commands so much money, only a relatively minor discount to purchasing actual land in Aus. I guess it’s another one of the ‘magical’ qualities of Negative Gearing? Although I thought Canada has a similar NG-style tax rort available.

      • expensive units are good sign that we have issue with speculative bubble. It’s hard to argue that land prices drive home prices when units that ‘use’ 10sqm of land cost almost as much as a nearby houses. Also, it’s hard to argue that there are issues with supply when so many units are being built every year and so many stay empty.

        What is clear is that the only thing that’s driving prices up is expectation of prices going up – in other words it’s not important what you buy as long as you can sell it for more in few years – tulip mania in its purest form

      • it looks like onthehouse used gross – before tax and super wage (although it looks to high compared to ABS numbers) and than subtracted tax and super, while Canadian stats are for pretax wages.

  5. Just heard Jo Hockey give farewell speech… explicitly said negative gearing should be restricted to new builds only, pointing to it’s affect in causing speculation in existing property…

    Even though I was one of the first to speak up about concerns over SMSF leveraging into property (online and in submissions to Government), I think that leaving it out of the response to the Murray Inquiry was right if the Government now seeks to address the full suite of distortions to the housing market…

    • I doubt the government wants to address any distortions to the housing market. Joe only mentioned negative gearing because he’s not in power – we all saw the cover-up when he could have done something. And likewise, no government wants to be the one to pop the bubble, so the only thing to do is to keep inflating it. Unless it pops despite government intervention; not because of it.

      • Leave all stimulus in place otherwise you’ll get the calls after that the crash was caused by the removal of stimulus.

  6. Auckland wins. Given that our home ownership rates in the city have most likely fallen to around 56 percent from the 2013 census, that first home buyers have exited left , as the governments first home grant would now only stretch to a garage. Migration , even though its running at historic highs is in reality having little effect, as they do not appear in first home buyer stats nor in rents . Incomes nor rents do not support the prices , sadly mortgage rates will have to fall to maintain the system, particularly now that overinflated agricultural land appears to be losing its value.

  7. Canadians pay property taxes each year which are assessed by local government on the house and land value.
    Also, lots of appealing options within a 1-2 hour flight means that mobile workers can follow the money.
    Two key differences in otherwise very similar markets.

      • They create affordable income, payroll and GST payments from workers and shift the burden to property holders, not a bad thing.

      • they also shift burden on unemployed, sick and elderly homeowners with low income or without income

        it taxes only one kind of wealth acquired with after tax money

  8. Many life style properties (ski resorts etc) are not being funded by the banks.

    The canadian banks are simply refusing to finance them. This means finding a cash buyer – and they are rare in Canada – unlike Sydney.