The wave that is Canada’s housing market began swelling last summer and is still showing no sign of cresting many months later.
The continued strength of the market in the face of historic economic disruption has taken many analysts by surprise. It wasn’t long ago that the Canada Mortgage and Housing Corporation (CMHC) was predicting that home prices could decline significantly as a result of the pandemic.
In a recent research note from BMO Economics titled “Unbreakable Canadian Housing?,” Chief Economist Douglas Porter writes that, instead, sales and prices have hit record highs.
Of course, Canada isn’t entirely unique when it comes to seeing its housing market take off during the pandemic. The US housing market has also been a major source of economic strength south of the border.
But in his note, Porter writes that Canadian home prices have become even more extreme in recent months when compared to prices in the US.
While a perfect comparison is difficult to achieve, Porter estimates the average price of a Canadian home is 40 percent higher than an average US home. The economist used $617,000 as the average Canadian home price as of December and $445,000 (in Canadian dollars) as the average US home price in his calculations.
He writes that Canadian home prices started pulling away from their US counterparts a decade ago and the pandemic has only accelerated the widening gap.
This begs the question: What’s so special about Canadian housing?
Demographics, lower interest rates, a higher percentage of the population living in the country’s largest cities and home ownership rates are all possible contributors to the price gap. However, Porter zeroes in on population growth driving demand for housing and consumer preferences as the biggest factors to consider.
On the growth side, Porter points to Canada’s “robust population growth, driven primarily by net immigration.” This may change as the new Biden Administration unwinds the previous administration’s restrictive immigration policies, but that doesn’t change the fact that, prior to the pandemic, Canada saw much higher annual percentage increases to its population.
The impact of Canadian consumer choices is more difficult to measure, but Porter believes it could be the key to understanding the home price gap.
“[A] much more fundamental answer may simply be that on balance Canadians have made a collective choice to allocate more resources to (and thus “consume” more) housing than other countries,” he wrote.
“After all, housing is in fact an investment that can provide an ongoing benefit. While some dismiss it as ‘consumption’, who is to judge if this type of consumption is better or worse than other forms of spending?”
