Runaway house price increases have become the rule across Canada. Since 2000, house prices across the country rose more than incomes in all of 35 larger markets, while prices rose more than four times incomes in Toronto and Vancouver. This is in stark contrast to the three decades after 1970, when Canadian house prices rose at about the same rate as household incomes, hovering at approximately three times household incomes. Moreover, there could be a more ominous development on the horizon. Mortgage interest rates are likely to increase in the next few years, which would make it even more expensive to purchase a house.
Housing affordability is important not only to people, but also to the economy. Housing is typically the largest expenditure item in the household budget. When housing costs rise substantially, households have less discretionary income, a lower standard of living, and purchase less in other goods and services. This can hobble job creation and economic growth. The overall house price increase in the 35 markets was five times the general inflation rate, four times the increase in gasoline prices and higher than any other major expenditure item in the Consumer Price Index.
In response to all of this, concerns have been raised by the Bank of Canada, as well as international organizations, such as the Organization for Economic Cooperation and Development and the International Monetary Fund.
Until recently, it could be assumed that middle-income households could afford to buy their own homes and that housing subsidies were needed only for lower income households. Runaway house price increases are changing this. According to the Royal Bank Affordability report, the median income household needs 61% of its income in Toronto and 81% in Vancouver to pay the mortgage on the average priced house or condominium.
Alberta's two large metropolitan areas have also experienced runaway house prices. In both Calgary and Edmonton, house prices have shot up relative to incomes, after having been stable between 1970 and the early 2000s, also hovering around three times household incomes.
Between 2000 and 2015 the average house price rose approximately 162% in the Calgary metropolitan area. By comparison, the average household income increased a healthy, but much smaller 73%. Thus, house prices increased at a rate of 2.2 times that of household incomes.
House prices rose even more sharply relative to incomes in Edmonton. The average household income increased strongly in Edmonton, up 75% between 2000 and 2015. However, the average house increased much more, at 202%, or 2.7 times household incomes.
Why have middle-income house prices increased so much? Demand has been driven higher by lower interest rates. But this also happened in other nations, and where builders were able to respond to demand by building a sufficient number of houses, price increases were modest. Then, strong inter-provincial migration drove prices up as builders struggled to meet demand in the mid-2000s, a result of Alberta’s strong economic growth. This drove prices higher, but once building activity met the demand, prices should have fallen back to historic norms. They did not. In the meantime, the effect of stronger land use regulation became evident, with barriers to building on inexpensive greenfield land, while high development fees and levies had become higher. In response, prices continued to rise.
Meanwhile, economic conditions over the past year in Alberta have brought a respite in house price increases. But, when a more normal economy returns, the rapid house price increases seem likely to resume, driven by the stronger land use regulations and further intensified by higher interest rates. This would further burden Alberta households, some who would have to pay more to buy houses, and others who would be denied the opportunity for ownership by the higher prices.
Governments should take action to keep house prices under control. A critical part of this is addressing the fundamental economic relationship between over-zealous land use regulation and higher house prices. New Zealand, with an Auckland housing crisis similar to Vancouver’s, is considering a program to establish annual house price to income goals, and automatically ease development rules if they are not met. This could be a model for Calgary and Edmonton to follow.
