Clay Jarvis
Beth Buczynski
In many ways, the Canadian housing market is the same today as it’s ever been: hard working people trying to cordon off a tiny speck of the world they can call their own.
But like most simple concepts encroached upon by a complex world — nature and peace are two examples — homeownership has become something many Canadians must struggle to obtain.
Home buyers encountering the housing market for the first time in 2024 can be forgiven for thinking it’s never been less approachable. These buyers have never seen mortgage rates or home prices so high, population growth so rapid or housing supply so low. But context is key to understanding the market and making a plan to survive it.
NerdWallet analyzed over 40 years of housing, demographic and economic data to compare today’s market to markets of the past, including those that were dictated by interest rates north of 20%. The trends we were most interested in include:
- Affordability: The competing paces of home price and income growth.
- Supply: Population growth and home building activity.
- Financing: Tightening mortgage guidelines, disposable income and debt levels.
Whether you’re a prospective home buyer or someone interested in fixing Canada’s broken housing market, it’s important to know just how big a challenge lies ahead.
Affordability: Home prices versus income growth
Though both home prices and income have trended upward over the past forty years, the pace and extent of those increases has been completely out of whack.
Home price growth, particularly in the last two decades, has outpaced the growth of earnings to a remarkable degree.
Home prices vs. individual earnings
In 2003, the average Canadian’s annual earnings was $35,937[1]. In 2023, it was $62,636, a hefty increase of 74.3%[2]. Over the same period, the average home price in Canada increased from $207,510 to $678,282 — a 227% increase.
The average home price was about 5.8 times the average Canadian’s earnings in 2003. By 2023, it was 10.8 times.
Home prices vs. household earnings
Considering that many Canadians buy property with another person, looking at household income gives us another useful trendline to examine. Differences in the available census data allow us to go back a little further with this particular comparison.
| Year | Average Home Price | Median Household Income | Price-to-Income Ratio |
|---|---|---|---|
| 1980 | $67,024 | $21,252 | 3.2 |
| 1990 | $142,053 | $41,401 | 3.4 |
| 2000 | $164,392 | $46,752 | 3.5 |
| 2010 | $339,052 | $57,299 | 5.9 |
| 2020 | $566,828 | $84,000 | 6.7 |
The ratios here don’t get quite as ugly as those based on individual earnings, but the trend they illustrate is still pretty dispiriting. You can see a stark contrast between the 1980-2000 period, when the price-to-income ratio remained relatively stable, and 2000-2020, when it almost doubled.
In the 40 years between 1980 and 2020, the average home price increased by about 746%, while the median household income rose by 295%. Employers resistant to wage increases have played a role in the discrepancy, but so have buyers willing to pay far more than a home’s asking price.
Household income grew significantly from 2010 to 2020, but not enough to keep pace with an increasingly frothy market. Once the COVID-19 pandemic hit and mortgage rates dipped to record-lows, buying power received a once-in-a-lifetime jolt. The combination of low rates and FOMO-fuelled overbidding drove the average home price in Canada over 24% higher between 2020 and 2022.
Prices have softened somewhat since interest rates started rising in 2022, but it would take a full-blown economic catastrophe for them to return to pre-pandemic levels — when they were already outpacing Canadian earnings.
Supply: Building activity, population growth and household formation
It’s likely that the pandemic’s frantic overbidding wouldn’t have been as pronounced if home buyers had more properties to bid on. When buyers feel that the house they’re competing for is their only chance to own a home, a sale becomes an auction.
That’s a sweet situation for sellers and their real estate agents, but it’s hell for the average buyer.
Just how undersupplied is Canada’s housing market? In 2023, the Canada Mortgage and Housing Corporation estimated that the country requires an additional 3.5 million housing units to be built to “restore affordability” by 2030.
That’s not 3.5 million total; that’s 3.5 million on top of the millions of units that builders are projected to complete by then. Housing starts peaked at a little more than 271,000 in 2021; doubling that record pace every year for the next six years would still fall short of CMHC’s lofty goal.
CMHC’s housing targets might not feel so out of reach if the country’s builders were able to match the pace of population growth. That’s hard to do. In addition to the country’s ambitious immigration targets, builders are also up against slow approval processes, rising costs and labour shortages.
Looking at the following graph, we see that starts and population are following similar trendlines. It’s not as if builders are ignoring population growth, they just can’t keep up with it.
In an email to NerdWallet, a spokesperson at the Canadian Home Builders Association said the supply-demand imbalance won’t improve in the short-term. Sentiment among the country’s builders has cratered due to the same high interest rates and tight mortgage guidelines buyers face.
“[I]f buyers can’t buy, builders can’t build,” the spokesperson said. “Low builder sentiment will result in falling housing starts, when we need to be building more.”
Immigration’s role in the housing crisis
In general, Canada benefits from immigration. A growing population helps maintain a tax base large enough to pay for our health care system, mitigates the negative effects of our plummeting national birth rate and plugs the holes in industries suffering from labour shortages.
But a high rate of immigration also places added pressure on Canada’s housing stock. Between 2024 and 2026, the federal government anticipates the arrival of almost 1.5 million new permanent residents. (That’s in addition to the more than 1.1 million who arrived in the year ending July 1, 2023.) Not all will buy a home, not all will stay, but every one of them will need a place to live.
“We are aware of the acute challenges related to housing and are pursuing strategies that support Canada’s continued need for immigration while leading the national effort to solve Canada’s housing crisis,” Jeffrey MacDonald, communications advisor at Immigration, Refugees and Citizenship Canada, said in an emailed statement.
When it comes to the housing market, it’s helpful to think about immigration the way you would the Bank of Canada’s interest rate hikes over the last two years. The intention isn’t to help — or harm — home buyers, it’s to keep the economy from imploding.
Oh great, even more supply problems
The rise of one-person households presents another challenge for the market.
In 1961, the average Canadian household contained four people. By 2021, that figure had dropped to 2.4, largely due to the rise of single-resident households. As more people decide to live alone, it creates the need for more housing units.
In a 2022 analysis, RBC economists estimated that declining household sizes alone would create almost 90,000 households between 2021 and 2024.
The timing of this rise in household formation couldn’t be worse. Not only are builders unable to keep up with demand, but baby boomers aren’t yet old enough to start downsizing and flooding the market with their three- and four-bedroom homes, says Phil Soper, president of real estate company Royal LePage.
Soper says boomers’ relative health and wealth compared to previous generations means they’re comfortable where they are.
“So what does this all mean? We need a lot more houses for the same population — and we’ve got a bigger population. That’s what’s driving home prices predominantly,” Soper says.
Mortgage financing: Lending guidelines, savings and debt
Housing supply constraints only matter if you can get a mortgage. Tighter lending guidelines, moderate savings rates and soaring personal debt levels all play a role in preventing today’s buyers from securing the financing required in an overpriced market.
Here’s a small sample of mortgage changes enacted by CMHC, the Department of Finance and the Office of the Superintendent of Financial Institutions since 2008:
- 2008: Five percent minimum down payment requirement created.
- 2012: Maximum amortization period for insured mortgages drops from 30 to 25 years.
- 2012: GDS (39%) and TDS limits (44%) established for borrowers with credit scores above 680.
- 2016: New down payment requirement set for properties worth more than $500,000.
- 2016: Stress test and minimum qualifying rate implemented for insured mortgages.
- 2018: Guideline B-20, i.e. the stress test and minimum qualifying rate for uninsured mortgages, is implemented.
- 2021: Minimum qualifying rate increased for both insured and uninsured mortgages.
In a perfect world, where people are saving more and paying off their debt every month, these protective measures wouldn’t create such a barrier to homeownership. But that’s not where we live.
Savings struggles
Canadians’ savings levels have declined dramatically over the past several decades. In the chart below, you’ll see the decrease in household savings over four different five-year spans, each one including a period of elevated interest rates.
The bump in average household savings seen from 2018-2022 shouldn’t be seen as the beginning of a trend. The average household savings rate in 2018 was a paltry 0.625%; in 2019 it was 2.1%. Without COVID putting a lid on spending in 2020 and 2021, and inflation since then forcing people to cut costs, it’s possible that household savings would be no higher today than they were from 2004-2008.
Declining savings rates are a real concern in a country where minimum down payments are on the rise. In 2008, when the 5% minimum down payment requirement was initiated, the average home price was $305,342. Buyers could get a mortgage by putting down just $15,267. The average home price in 2023, $678,282, required a minimum down payment of $42,828.
And that’s just the minimum. Buyers may have to put significantly more down to qualify for a mortgage with a B lender, or to pass the mortgage stress test and secure financing in line with current housing prices.
Debt dilemmas
High debt service ratios can also negatively impact Canadians’ mortgage prospects.
“Payments for other credit facilities such as credit cards, lines of credit and loans are typically included in these ratios, and therefore if a consumer has high levels of debt, it could be harder for them to be approved for a mortgage or to access lower rates,” Equifax Canada said in an email.
As a person’s debt rises, so does the barrier between them and a more affordable mortgage. And debt levels have been climbing for decades.
Non-mortgage debt is problematic enough when applying for financing, but high home prices have led to ballooning mortgage costs as well. When the 1981 census was released and interest rates were around 18%, the average monthly housing cost for homeowners, which includes mortgage, utility and tax payments, was $384. In 2021, when interest rates were near record lows, homeowners’ average monthly housing cost was $2,066.
Keeping both a high mortgage payment and other debt obligations within a lender’s TDS limits is asking a lot of Canadian home buyers.
“We can’t quantify the exact impact of elevated debt on ability to obtain mortgages,” Matt Fabian, director of financial services research and consulting at TransUnion, said in an email, “but we can see that the B-20 rules implemented in 2018 have had a significant impact on qualifying.”
What’s a home buyer to do?
Hopeful homebuyers may have a justifiably bleak view of the Canadian housing market at this point. But there are always steps you can take to improve your chances of buying a home, such as:
- Boosting your income. As we’re living in the age of the side-hustle, your talents and hobbies could be a way for you to juice your income. Investigate online freelancing opportunities through sites like Fiverr, too.
- Saving more money. Saving money is easier said than done, but cutting unnecessary expenses and putting the savings into a First-Home Savings Account can help boost your down payment. So can taking on a roommate and decreasing your rent expenses.
- Working on your credit. Check your credit score and credit report to see if there’s anything you can do to improve your creditworthiness. At the very least, prioritize paying down your high-interest debt so it’s less of a drag on your finances.
- Preparing for a tight market. When you’re ready to enter the market, expect it to be fast and unforgiving. Get pre-approved for a mortgage early on, and when you do, make sure you hand over all the required documents to avoid any unnecessary delays.
When it comes to improving the housing market in general, there’s not much to do besides getting involved where you can.
When elections roll around, vote for candidates with practical plans to improve housing supply. If you have an idea that you think might improve the housing situation in your community, share it with a local councillor or MPP.
Confront NIMBY-ism by having meaningful conversations with people about the benefits of increased housing density.
The kind of housing crash Canada would need to bring affordability back to the market isn’t likely, nor is it something we should be rooting for. We have to work within the bounds of what we’ve got, narrow as they’ve become.
[1] Calculated using average weekly earnings including overtime for all employees. Source: Statistics Canada.
[2] Calculated using average weekly earnings including overtime for all employees. Source: Statistics Canada.
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