According to The New York Times, Canada now has the most affluent middle-class in the world. This is based on a newspaper study commissioned by LIS, which maintains the Luxembourg Income Study Database. According to The Times “the American middle class, long the most affluent in the world, has lost that distinction.”
The LIS study found that Canadian per capita median income, after taxes, had virtually tied that of the United States by 2010 and had grown faster since that time. This is a remarkable achievement. In the last decade, Canadian incomes grew nearly 20 percent, while U.S. incomes grew only 0.3 percent.
Much of the difference is attributable to U.S. fiscal policies that propelled the destructive housing bubble and subsequent bust. This crippled the US economy and produced considerable collateral damage by triggering the Great Recession. Canada did much better, helped at least in part by a banking sector ranked the soundest in the world for eight years running by the World Economic Forum (host of the annual Davos forum).
Yet, in some parts of Canada, skyrocketing house prices have eroded much of the increase in discretionary incomes. Discretionary income is the amount left over after paying taxes and paying for necessities, such as housing, transportation, food and clothing. Discretionary income virtually defines the standard of living and poverty.
As has occurred across the United Kingdom, France, Australia, New Zealand and parts of the United States, extraordinary house price increases have occurred as urban planning regulations have been imposed to seriously restrict the land available for new residential development. These policies go by various labels, such as “urban containment” and “smart growth”.
Typically, and in Canada, house prices rose at about the same rate as incomes before the adoption of urban containment policy. In recent years, house prices have virtually exploded in Toronto and Vancouver.
Toronto area house prices have increased 95 percent in the last decade, more than three times the earnings increase rate of Ontario workers. Today, an apartment condominium costs as much relative to average incomes as a detached house did in 2000.
It is a characteristic of basic economics that prices tend to rise when supply is limited, other things being equal. Reducing the land available for new housing tends to increase prices, as the smaller number of sellers bids up land prices. This is evident in the Toronto metropolitan area and now spreading throughout the Greater Golden Horseshoe as Ontario implements its “Places to Grow” urban containment program.
The problem in the Vancouver area is of much longer standing. For decades, Lower mainland officials have severely limited the land on which new housing can be built and house prices have risen relative to incomes since the 1970s. But the deterioration has accelerated. Over the last decade, average house prices have risen 120 percent, more than four times the earnings increase of British Columbia workers. The Demographia International Housing Affordability Survey rates Vancouver as having the second most unaffordable housing among 86 major metropolitan areas in nine nations, trailing only Hong Kong.
Things could get much worse in Vancouver. In a report entitled Downsizing the Canadian Dream: Homeownership Realities for Millennials and Beyond, the Vancouver City Savings Credit Union (Vancity) indicated that present trends could drive Vancouver detached house prices to $2.1 million by 2030, double current prices. The required mortgage payment would be more than the average income. Vancity says that the Canadian Dream, with its “focal point” of the single detached house, is now in jeopardy.
Then there is the issue of equity. Historically, Canada has had a strong social conscience. Yet, higher house prices lead to greater inequality. Low income households have to struggle with less discretionary income and poverty rises as a result of higher housing costs. Further, many middle income and lower income households are denied the opportunity for home ownership, and the potential for saving through rising home equity.
All Canadians, including middle income and lower income households, should enjoy the benefits of rising incomes, not having them eaten away by higher house prices that rise substantially faster. This requires serious policy reforms where urban containment is in place and avoiding implementation elsewhere.