When owning property creates more wealth than median income, Canada has a problem.

We weren't exactly sure what to expect before we started doing this analysis. We had hoped to conclude that employment (and other means of active income) has been fairly rewarding people in comparison to other more passive methods of wealth creation, such as property ownership. To do this, we compared home price appreciation to median after-tax income each year from 2005 to 2020. What we discovered was troubling, and not only for Toronto and Vancouver.


But let's start with the worst of the news:

From 2005 to 2020, someone owning a two storey home in Vancouver created approximately $600,000 more wealth than someone earning the median income during this time. This is an annual average of $40,000, which actually exceeds the 2020 median income in Vancouver. Just to "earn" as much as a two storey home owner, you needed to earn approximately $80,000 per year from 2005 to 2020.


Approach

The tables below show whether median after-tax income was greater or less than the annual price gains for two storey homes, the average home, and condos in CMAs (sources: Statistics Canada and CREA). Note that the geographical boundaries for each region are not identical between Statistics Canada and CREA. Also, the income statistics would be higher if we were only looking at full-time employees - but this data is unfortunately not available to us for each year we are looking at and we also wanted to consider those who are not employees but have other types of earned income.


Of course there are expenses that come with owning a home, but on the other side - if these homes are generating rental income then that would be incremental to the price appreciation discussed in this article. For example, in Toronto - 2020 median after-tax income was $32,000 and home prices increased by $94,000, resulting in the net figure shown of ($62,000). In other words, you would have created $62,000 more wealth in 2020 if you had owned a two storey home instead of earning the median income. The numbers in red can help you quickly see the years where home price gains exceeded median after-tax income.


Two storey homes:

Average home:

Condos:

Quebec City and Winnipeg were the only two cities where earned income was consistently higher than home price gains. Toronto and Vancouver had atrocious results, while Montreal and Ottawa have also been trending in the wrong direction. Calgary and Edmonton have not seen explosive home growth relative to the other cities, which has allowed them to stay much more affordable.


Below, you can see the total net difference between cumulative median after-tax income and price gains over the past fifteen years.

When looking at Toronto and Vancouver, the numbers are astounding and unconscionable. Consider that all this wealth could have been created by making a down payment in 2005 as low as $19,000 in Toronto and $32,000 in Vancouver. If these amounts were invested in the S&P 500 instead in 2005, by 2020 they would have earned a total return of approximately 329% including reinvested dividends (or 9.581% annualized). Although the growth rate for the S&P 500 was higher than the Canadian housing market, the big difference is leverage. If someone makes a 5% ($25,000) down payment on a house that costs $500,000 and the value of the home increases by 5%, they have essentially made a 100% return on the upfront payment. The average person who does not have collateral would not be able to use leverage and invest $500,000 instead of $25,000 in the S&P 500 in 2005. Of course there are further mortgage payments made subsequently but you would otherwise be paying for rent costs.


While the other cities may look good initially - we need to see the net differences in terms of an annual average.

Even in the cities with positive numbers, are those incremental annual amounts worth the time and effort? In Montreal, the median income created approximately $8,000 per year of incremental wealth compared to owning a two storey home.


Obviously most people cannot just buy a home instead of working, because they need the liquidity and cash-flow. But if we are not sufficiently incentivizing and rewarding people for their work, it is simply demoralizing. On an individual level - this is causing mental health problems and hopelessness. At a national level - this is causing brain drain and will hurt the economy and innovation. When we were growing up we were told "If you work hard, you will succeed". Well, too many Canadians are tired of working hard and not seeing the results.

If you have been struggling and are looking for help, visit Crises Services Canada.

What is The Habistat? We are two millennials working overtime to bring clarity to the Canadian real estate market and advocate for stable housing markets that work for the average person.


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We are two millennials working overtime to bring clarity to the Canadian real estate market and advocate for stable housing markets that work for the average person. If you would like to support our mission, please consider donating below.