The Drive Behind Canada’s Housing Market

According to data from MLS, the average house in Canada costs $716,828.

The 28/36 rule has different version but generally speaking:

The 28/36 rule states that a household should spend no more than 28% of its gross monthly income on total housing expenses, and no more than 36% on all debt, including housing-related expenses and other recurring debt service.

Meaning after a 20% down payment, a mortgage payment for the remaining $573,462 would be $3,181 on a 30-year fixed mortgage. For $3,181 to be at max 28% of your gross monthly income, you’d need to make $11,360 per month or $136,320.

This level of income would put you in the top 5% of income in the country.

So what does this mean for home buyers? If you aren’t already in the marketing, you need to make a lot of money.

Anyone my age (mid 20s) who owns a home either:

  • Makes over $100,000 a year
  • Jointly makes over $100,000 a year with a partner
  • Had financial help from parents
  • Got into the housing market several years ago
  • Any combination of the above

What’s causing this?

It’s mainly supply and demand. During the pandemic, the demand for single family homes rose. Low interest rates can cause aggressive growth, but thinking interest rates are the leading drive is simply due to lack of knowledge/history.

Here are two charts showing lack of correlation:

Historical Home Prices: US Monthly Median from 1953-2021 - DQYDJ
Interest rates are going to go crazy soon?

In the 1950s, interest rates were low, but as you can see, housing prices generally remained untouched.

Now that the data has debunked interest rates as the primary driver, we can look at the real issue, supply and demand.

Canada isn’t losing houses. If anything, we are building and continue to live in old houses. I couldn’t tell you the last time I saw a house demolished and turned into a farmer’s field. If anything, people are buying old houses and fixing then flipping them. So supply is not decreasing.

Demand comes from population growth generally, in addition to people buying/owning multiple houses, sometimes as rental properties. While “boomer money” presents a problem for future generations, it’s not the primary driver.

Population growth comes from fertility rate and immigration rate. Looking at the fertility rate, it’s constant.

Let’s look at immigration.

Canada’s population (2019) – 37,590,000

Canada’s immigration (2019) – 313,600

Canada’s immigration rate – 0.83%

USA’s population (2016) – 323,100,000

USA’s immigration (2016) – 1,180,000

USA’s immigration rate – 0.36%

Canada’s immigration is 2.3x that of the US’s.

Immigration in Canada is necessary for the aging workforce but at this velocity, it’s not sustainable.

Recent election promises discussed a plan to build 1.5 million houses. At $300k per house, the project cost would be $450 billion. For comparirson, that’s 62% of the US’s military budget (a country 9x bigger in terms of population and 12x in terms of GDP), aka money Canada doesn’t have.

The solution to get us out of this mess? I don’t know. The solution on a personal level? Make a bunch of money hopefully, or move.

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