How Affordable Is Housing in Canada Anyway?

June 22, 2011


With the pricing for basic necessities like gas and food on the rise, it is no surprise that people are more conscious of how they spend their money. As a result, the average person is even more hesitant with regard to housing and the plausibility of making a purchase that requires such a sizable investment. Staying abreast of mortgage news is one way to gain confidence regarding these financial decisions.

Is the concern over rising Canadian housing prices warranted?

One way to look at if Canadian housing is affordable is to compare it with other similar countries or economies and see how we fair. The American recession has been blamed in large part on an overindulgent housing market that required people to rely too heavily on borrowed money, to accommodate housing prices that were too far out of their reach. As a result when people were no longer able to afford their houses the banks took significant losses far beyond what the financial infrastructure was able to manage. Of course housing is not the only factor that negatively affected the US economy, but it was a significant contributing factor. To help to remedy this situation the industry experienced a massive nationwide market correction causing it to have the lowest averages in housing affordability when compared to similar economies.

How does the housing market in Canada compare?

Demographia publishes an annual comparison of housing affordability for metropolitan markets in Australia, Canada, Ireland, New Zealand, the UK and the US. Demographia measures affordability through a ratio of median house price to median household income. The median was determined for each metropolitan market (with a population of 1000000), and then taken for the remaining non-metropolitan areas (with populations of less than 10000000). Scores below 3.0 were determined to be affordable, between 3.1 and 4.0 considered moderately unaffordable, and between 4.1 and 5.0 seriously unaffordable.

The results are clear if we look at Canada vs. the US in terms of National averages in major metropolitan areas Canada has a 4.6 average where as the US has a 3.3 average and when non metropolitan markets are considered Canada’s average is 3.4 while the US has an average of 3.0. Thus, Canada ranks second with numbers just above the US as well as a displaying a significant disparity between it and the other countries compared in the major metropolitan markets. When the sample is expanded to non metropolitan markets, it is even more solidly in second.

Country National Average (major markets) National Average (all markets)

  • Australia 7.1 (5) 6.1 (32)
  • Canada 4.6 (6) 3.4 (35)
  • Ireland 4.8 (1) 4.0 (5)
  • New Zealand 6.4 (1) 5.3 (8)
  • UK 5.1 (16) 5.2 (33)
  • US 3.3 (52) 3.0 (211)

*Number of markets in parentheses

In a similar report done by the IMF, One section of the report compared housing prices in advanced economies, actual housing prices were compared with estimated prices based on an economic model over a 10 year period from 1997 – 2007. The report found that several economies were overvalued, such as Ireland, where about 30% of the increase in Irish housing prices over the period 1997-2007 were unexplained by economic fundamentals. Thus, Ireland’s housing market could be considered overvalued by about 30%. On the other hand, the increases in Canada’s housing prices over the same period were actually about 3% lower than the economic fundamentals would have predicted!

  • Overvalued by about… Countries
  • 30% Ireland, the Netherlands and the UK
  • 20-25% Australia, France and Norway
  • 15-20% Denmark, Belgium, Sweden and Spain
  • 10% Italy, Japan and the US (with housing prices adjusted)
  • 0-5% Finland and Germany
  • -5% Canada and Austria

Finally let’s look at The Economist data on housing affordability in a numbers of Countries. Look at the graph and you will clearly see that Canada’s housing prices have increased the most gradually between 2000-2010 as well as stayed the most consistent, especially as compared to the US.

All and all there is a lot of information out there that suggests that even in this challenging economy Canadian mortgages and housing is affordable and in line with average salaries and costs of living. So although Canadians can be encouraged to clip coupons and to cut back on road trips because of raising grocery and gas prices, avoiding the purchase of a home is not warranted after all, but instead is likely to be one of the best returns on investment made in today’s financial climate.

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