Canadians Should Celebrate Stalling Home Prices: New study

Why Canadians need Statistics Canada to Improve Measurement of Housing Inflation in the CPI

After decades of relentless increases, recent dips in home prices have captured attention across Canada. How we judge stalling or falling home prices in this moment is critical. Are they good? Bad?

“Our new study helps Canadians to answer this question,” explains Dr. Paul Kershaw, lead author, policy professor at the University of BC, and founder of Generation Squeeze. “We report on the massive gap that remains for people starting out in the housing market between their full-time earnings and average home prices. We report this gap for all of Canada, every province, two territories, and many cities from coast to coast.”

The findings are striking. If housing markets are stalling or levelling out, they are doing so with prices remaining at harmfully high levels.

The price of an average home in Canada would need to drop $341,000 – half of the 2021 value – to make it affordable for a typical young person to carry a mortgage that covers 80% of the value. Or earnings would need to increase to $108,000/year – double what full-time work typically pays Canadians age 25-34.

For those locked out of home ownership, average annual rent for a two-bedroom unit in Canada has reached $14,000. This compares to ~10,000 back in 1981, after adjusting for inflation.

There is notable regional variation.

  • In Ontario, recent modest price dips do nothing to change the fact that the province suffered an erosion of unaffordability over the pandemic unmatched by any other province in the last half century.

  • BC and Ontario now share the infamy of having the greatest housing wealth inequality and unaffordability. Challenges are especially great in Metro Vancouver and Greater Toronto, where young adults must work full- time for 27 years to save a 20% down payment on an averaged priced home. But the problem has spread beyond those metropolitan areas. Saving a down payment takes 22 years in Victoria and Hamilton, 20 years in Kitchener,19 in London, and 17 in Kelowna.

  • When Baby Boomers started out as young adults in BC and Ontario in the 1970s, saving a 20% down payment took just 4-6 years of full-time work. The dramatic increase in home prices since then has grown their housing wealth – windfalls that are largely untaxed because of the home ownership tax shelter.

  • For many years, Quebec resisted the contagion of housing unaffordability and housing wealth inequality. But significant average home price increases during the pandemic provide worrisome signals that must be monitored – especially in Montreal, where it now takes 13 years to save the 20% down payment.

  • While affordability has eroded in Alberta compared to earlier decades, compared with the other three most populous provinces, Alberta remains “relatively” affordable. The typical young adult must work 9 years to save a 20% down payment on an average priced home. This “Alberta Advantage” is an economic asset that should be protected by parties in the May 2023 provincial election.

Full data on gaps between home prices and earnings in cities and regions across Canada are available in part 5 of our report, which can be downloaded at:

Stalling home prices follow six interest rate hikes

The six rate increases by the Bank of Canada since March 2022 have contributed to average home prices retreating from their peak in February back to ~2021 levels.

Given the many years of home price inflation Canada has endured, why didn’t the Bank of Canada raise interest rates sooner?

A key part of the answer is that Statistics Canada failed to sound the alarm. Stats Can shapes our national dialogue about inflation by calculating the Consumer Price Index (CPI). The CPI is one important signal the Bank of Canada looks to when evaluating its success at keeping inflation in check.

What’s surprising is that the CPI doesn’t pay much attention to the size of the down payment that first-time home buyers need to save. Nor does it adequately consider the total amount these buyers would need to borrow. Instead, the CPI monitors how much existing home owners would need to pay to replace their current home, along with interest on current mortgages.

This means that the CPI doesn’t adequately measure things that matter to younger people and newcomers to Canada who aspire to purchase a home. This shortcoming, along with others identified by the Business Council of BC, gives rise to a troubling data disconnect.

Since 2000, average home prices have risen a whopping 318%. Yet Statistics Canada reported that total inflation over the same period rose by just 48%. Failing to capture skyrocketing home values made it appear that inflation stayed around the Bank of Canada’s 2% target each year, which discouraged the central bank from raising interest rates – until the pandemic and conflict in the Ukraine contributed to soaring energy and food prices.

Just like the right road signs help keep us safe by making traffic clearer and more predictable, the right economic signals help steer our financial systems towards stability, prosperity and equity. Unfortunately, the housing inflation signals sent by Stats Can gave us the green-light to speed recklessly through intersection after intersection, putting ourselves and others in danger.

If we’d gotten the signals right years ago, we could have recognized the perils of runaway housing inflation sooner, potentially sparing younger generations some of the harm caused by soul-crushing levels of unaffordability.

There’s no silver bullet to restore housing affordability or reduce housing wealth inequality, but there is ‘silver buckshot – a comprehensive, multitargeted approach. Increasing housing supply, revamping tax policies, and protecting renters, are all important. But so is ensuring that accurate information about inflation drives our monetary policy, because that policy is so critical for fueling or slowing home prices.

The full report is available here:

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