Canadian and US real estate prices are both at foamy valuations, but are not the same. US Federal Reserve Data (from the Fed) shows house prices rose faster than incomes in the second quarter of 2021 for both countries. The difference is that this has been a long-term trend for Canada since 2005. Meanwhile, in the United States, house prices have only recently started to outstrip growth. In contrast, the gap between home prices and incomes in Canada is comically large compared to the United States.
Home prices in Canada have risen 13 times faster than in the United States
The US Federal Reserve sees both Canada and the US in a real estate bubble, but they are really not the same. In the second quarter of 2021, Canada saw real house prices increase by 139% since 2005. In contrast, the United States saw real house prices increase by only 10% during the same period. Home prices in Canada have grown 13 times faster than in the United States over the same period. Before 2005, they had charted a similar path, before disconnecting.
Canadian incomes have grown faster, but not enough to justify the growth in house prices
Canadian incomes must have grown much faster than US incomes during this period, right? In the second quarter of 2021, real disposable income in Canada increased by 46% compared to 2005. In the United States, income only increased by 10% during the same period, so that Canada has increased faster. However, not enough to justify the gap between house prices and income.
The gap in Canada between house prices and incomes looks ridiculous next to the United States
It’s hard to appreciate these stats, so let’s combine them to show how far-fetched they really are. Home prices in Canada grew 64% faster than disposable income in the country from 2005 to the second quarter of 2021. In the United States, incomes grew 16% faster than home prices. The houses develop a significant premium compared to the labor force in Canada. In the United States, it is the opposite. Tracing the two trends together shows just how absurd the situation in Canada has become.
Canadian and US real estate prices relative to disposable income
The indexed growth of Canadian and US real estate prices and disposable income, in real terms (2005 = 100).
Source: US Federal Reserve; Better accommodation.
Now back to the Fed’s exuberance index showing real estate in Canada and the United States is in a bubble. That may be true, but it’s not even close to the same problem. Americans are trying to prevent disposable income from turning into unproductive housing costs. In Canada, this ship sailed a long time ago. Today, housing costs and the lack of productive investment are expected to make it one of the worst performing countries in the OECD over the next 40 years. At least there wasn’t a real estate crash, right?
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