The purpose of this article is not to create fear and panic, but to illustrate the future impact of home prices continually growing at a much faster rate than income. We have become all too accustomed to high single-digit or even double-digit home price growth, while ignoring the future implications of this. Despite a pandemic and the resulting recession, 2020 delivered yet another year of massive home price increases, with only a few of the regions reported by CREA (Canada Real Estate Association) seeing less than 10% annual growth. If recent trends are uninterrupted, Canada will face either an unprecedented housing market crash or unimaginable levels of wealth inequality. The real estate industry represents a huge portion of Canada's GDP and both government and central bank policies have supported inflated asset prices despite growing unaffordability - which is why it is difficult to trust that the powers that be will address this issue in the near term. As a result, either of the two alarming scenarios are possible if historical trends continue.
We looked at HPI benchmark home prices and median individual income from 2005 to 2020 and used this data to project what kind of situations we might see in 2030, 2040 and 2050, if past trends were to continue. Per CREA, the HPI is the most advanced and accurate tool to gauge home price levels and trends. The national home price CAGR was calculated using the simple average of CAGR for all regions reported by CREA. Regarding median income, 2019 and 2020 income data is not yet available from Statistics Canada and so we estimated this by applying CPI in those years to the 2018 median income. Please note that past trends are not necessarily indicative of future trends and our observations are not forecasts.
Below, we can see the compound annual growth rate (CAGR) for both national home prices and income, calculated for the fifteen years, ten years and five years leading up to 2020.
While 2020 saw extraordinary home price growth, the growth rate was still high regardless if we are looking at the past five, ten or fifteen years. Not only is home price growth consistently higher than income growth - home prices have been growing faster in recent years while income growth has not seen any acceleration. It's also important to remember that these growth rates are happening to very different base amounts. For example - the national average home price was $607,280 in December 2020 (per CREA) and the national median income was approximately $37,000 based on estimates using Statistics Canada data. If we apply the 5-year CAGR this results in a one-year change of $52,833 for home prices and $333 for income.
Now that historical growth rates have been established, what would happen if these same rates continued through to 2050? While 5.8% vs. 8.7% growth in home prices may not seem like much of a difference, the visuals below show how this would result in a difference of over $4 million by 2050.
We also looked at the CAGR for specific cities, which resulted in the following 2050 home prices for major cities:
- Toronto: $7.6M to $17.7M
- Vancouver: $6.4M to $11.1M
- Ottawa: $3.0M to $9.7M
- Montreal: $1.9M to $4.3M
Below, we can see how median individual income would grow based on historical trends.
The ratio of home prices to income must become a key metric that is measured and publicly reported on a frequent basis. In the GTA, the average home price compared to income increased from approximately 8.6x in 2005 to approximately 17.9x in 2020. This ratio will grow even faster if historical trends continue. The table below shows how the ratio will grow if current trends continue.
So are these scenarios even possible? After all, if incomes are so low compared to home prices then who could afford to buy them? While not necessarily probable, these scenarios are possible due to two main reasons. First, as long as the government and central bank policies support asset inflation, Canada will be an attractive place for both local and international parties to invest in real estate. If consistent home price increases are systemically supported, it can make sense to invest even when prices are high as they will likely just keep going higher. Second, those who already own real estate assets will benefit from the growth and be able to upgrade their homes or refinance to buy additional properties. Even in 2021 this is already happening; we are in a position where many who do not have existing real estate equity are unable to enter the market - yet there is record activity and home prices are still high and rising.
We cannot afford to just let these historical trends continue unchecked. Coordinated policy changes, increased monitoring and more public awareness are all crucial. Clearly, the trends for home prices or income need to change - so which makes more sense to address? It seems unlikely that we will see major changes to income trends. Raising the minimum wage to $15 saw plenty of resistance, the automation of labor is rising and putting jobs at risk, and many businesses are now struggling due to the COVID-19 recession. Even implementing UBI (Universal Basic Income) would not go far based on the levels that are currently being discussed approximating $1,000 per month. Curbing home price growth would be the most practical and effective path forward. Government and central banks influencing home prices would not be something new - their policies have been driving the increases in home prices for years. The home price to income ratio as well as rent cost to income metrics should be regularly monitored and publicly reported. These metrics are more relevant and impactful to the lives of most Canadians.
What can you do personally? Share this article and have these important discussions with friends, family and others in your community. Many people are simply not aware of how home prices and income have trended further and further apart, and see double-digit home gains as a good thing rather than a worry. The more this is discussed using real data, the more public pressure there will be to drive more sustainable affordability.
Our website has a number of interactive visualizations showing historical trends over time and allowing you to compare cities. Some examples that relate to this article are below:
If you are planning to buy a home in the coming years, make sure you start planning early! This down payment planner is a helpful tool for setting expectations.