Canadian Average Home Prices 40% Higher Than U.S

Written by Posted On Tuesday, 02 February 2021 00:00

During the second half of 2020, Canadian home prices soared across the country. The average home price is now about 40 per cent more than in the U.S., says economist Douglas Porter.

“As a result of resilient sales and construction activity, as well as record prices, housing’s share of Canadian nominal GDP rocketed above nine per cent by the third quarter last year. To say that’s an all-time high would be an understatement,” says Porter, chief economist at BMO Economics, in a recent report.

“It’s far above the long-term norm of a bit less than six per cent, and it’s more than double the current U.S. ratio of 4.3 per cent…. Historically, housing takes up a bigger share of Canada’s GDP compared with the U.S., but the spread has gapped up from an average of less than one percentage point in the 50 years to 2010, to today’s extreme of almost five percentage points.”

Porter says comparing prices in the two countries is “fraught with serious challenges given differences in incomes, mortgage markets, interest rates, urban/rural splits, housing stocks and a variable exchange rate.”

But he did it anyway, converting average U.S. home prices into Canadian dollars using a measure called a purchasing power exchange rate, “a very stable measure which takes income differences into account and is currently about 0.83.”

He compared December’s average Canadian home price of $617,000 with the U.S. mean price, which converts to about $420,000 Canadian – a difference of 46 per cent.

“What are the factors behind that 40 to 50 per cent gap in average home prices? That seemingly simple question is a source of great debate,” says Porter.

A study by the Fraser Institute last summer found that while housing became less affordable in Canadian cities during the period from 2006 to 2016, many American cities managed to grow their populations while keeping housing costs down.

The report says while the large metropolitan areas surrounding Dallas, Houston and Atlanta all experienced population growth and income growth at the same time as improved housing affordability, Canada’s largest cities with similar income and population growth became less affordable.

“Hundreds of American cities have improved affordability by containing the growth of housing costs, largely by helping increase the housing supply,” say the report’s authors, Josef Filipowicz and Steven Globerman. “The laws of supply and demand apply to housing, like any other good.”

Globerman adds, “Housing affordability is crucial to attracting top talent, so municipal policymakers in Canada should investigate how American cities managed to grow and prosper while at the same time remain affordable in a way that Canadian cities have not.”

Porter agrees that while supply is a factor, “we view it as secondary to the demand side forces. Even with any supply issues, Canadian new home building has been persistently above the U.S. pace on per capita terms for years, due to robust population growth.”

He says that if the problem of high house prices were solely due to supply issues, zoning constraints or building costs, those issues would also impact non-residential construction. But during the last five years, residential prices have grown far faster than non-residential prices.   

Several other factors have been cited to explain the difference between the Canadian and U.S. markets, Porter says. Stronger population growth in Canada has been driven by immigration, and although that took a pause during the pandemic, it’s expected to pick up again. Urbanation in both countries is at about 80 per cent, but there’s a higher share of Canada’s population living in the largest and most expensive cities. A third of all homes sold last year in Canada were in Toronto, Vancouver and Montreal.

Porter says most Canadians have mortgage terms for five years or less, while the U.S. has a large number of 30-year mortgages, which have higher interest rates. 

Homeownership rates in both countries are around 68 per cent. In Canada, there are no capital gains taxes on a principal residence, which Porter says plays a role in driving up home prices. “However, this factor is at least countered by partial mortgage deductibility for U.S. filers,” he says.

So if these factors don’t explain the big price gap, what does?

“A much more fundamental answer may simply be that on balance Canadians have made a collective choice to allocate more resources to…housing than other countries. And that’s not necessarily a bad thing, just a consumption choice,” says Porter. “It’s debatable that the heavy investment in housing relative to other areas is a misalignment of resources – as some have suggested – if that truly represents the preference of Canadians.”

The downside to Canada’s continued love affair with homeownership is that it creates high levels of household debt, which various governments have been trying to contain for years.

Many forecasts are calling for the real estate market to cool in 2021 as pent-up demand is eased. But the market may have some staying power as many would-be homeowners have been able to accumulate savings during the restrictions and lockdowns of the pandemic.  

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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