A home for sale in the Nutana neighbourhood in Saskatoon, in August, 2020.Kayle Neis/The Globe and Mail
Who or what is responsible for Canada’s unaffordable housing? Frequently cited factors include restrictive zoning, rapid population growth, permit delays, high development fees, slow wage growth and monetary policy.
To answer that question, it’s essential to ask: When was the tipping point that pushed Canada’s housing market into sustained unaffordability?
Housing affordability is commonly measured by the ratio of average home prices to disposable income. In the chart, we compare this ratio across Canada, the United States and the United Kingdom to see when Canada began to diverge from historical affordability norms.
In the U.S., home prices have generally ranged between six and nine times disposable income over the past 50 years. There were peaks at nine in 1980, 2006 and again in 2022, but each was followed by a correction. Canada’s home price-to-income ratio also remained in this range until 2007.
Home prices in Canada began rising steadily starting in 2001, but the true inflection point came around 2007 and 2008. Since then, the price-to-income ratio has consistently exceeded nine – reaching 10 in 2015, 12 in 2016 and climbing as high as 16 in 2022.
So what changed in 2007-08?
The most significant shift came in monetary policy. Following the global financial crisis, the Bank of Canada, mirroring the U.S. Federal Reserve, slashed interest rates to near zero in 2009 and kept them there for years. But unlike the U.S., Canada didn’t experience a housing crash.
While supply hasn’t been elastic enough to meet demand – mainly owing to restrictive zoning rules – the primary factor that shifted the supply-demand balance toward unaffordability appears to be demand driven by speculative investment.
Ultralow interest rates made borrowing inexpensive and encouraged investors to use mortgage leverage for large returns on relatively small down payments. This led not only to worsening affordability, but Canadians now also carry the highest levels of personal debt in the top 10 world economies.
Housing prices reflect a balance between supply and demand. But when monetary policy distorts that balance, the consequences can be long lasting. Canada’s extended period of ultralow rates may have helped avoid a financial crisis in 2008 but it also ignited a slow-burning affordability crisis that continues to unfold.
So while cutting rates in 2007-08 in Canada was the right medicine, the dose and the duration for which it was prescribed were not.
Hanif Bayat, PhD, is the CEO and founder of WOWA.ca, a Canadian personal finance platform.
Editor’s note: In a previous version of this article, the chart "Home affordability in Canada, United States and Britain" was published without credit for the data sources. This version has been updated.
