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Opinion: Households need more purchasing power to keep pace with rising property prices
Published August 12, 2024 • Last updated 55 minutes ago • 4 minutes reading time
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A pedestrian walks between homes for sale in the Leslieville neighbourhood of Toronto, Ontario. Photo by Mark Sommerfeld/Bloomberg Files
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For years, Canadian politicians have sleepwalked through the growing housing affordability crisis. Now that homes seem out of reach for so many and voter discontent on the issue could throw the upcoming election into disarray, they are on edge and looking for solutions. Any action on the issue is welcome, but the biggest solution of all is yet to come: giving households the purchasing power to keep up with rising home prices today and tomorrow by boosting Canadian productivity.
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It is difficult to overstate the magnitude of the crisis we are experiencing in housing affordability. According to the Bank of Canada's Housing Affordability Index, which measures the percentage of household income required to purchase a home under typical financing terms, affordability is at its lowest level since the early 1990s. Over the past 25 years, average household disposable income has increased by three per cent annually, while home prices have increased by an average of six per cent per year. These trends have only accelerated over the past decade, a period in which household incomes in Canada have been virtually stagnant even as comparable countries, particularly the United States, have experienced stronger income growth.
Most young couples looking for a new home in recent years have sensed these trends intuitively. Authorities were slow to recognize the magnitude of the problem and are now trying to encourage new home construction, acknowledging that decades of underbuilding have led to a shortage of supply and high housing prices. While this is a welcome move, it will take years of aggressive housing construction to correct the imbalance—time many Canadians cannot afford before buying. As a result, many homeowners have taken on significant debt to buy a home. For example, the average size of a mortgage in Toronto has risen from just over $300,000 in 2012 to over $500,000 by the end of 2023. Canadian households are now the most indebted in the developed world.
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As the cost of credit rises due to higher interest rates – and access to it becomes increasingly restricted – Canadians can no longer rely solely on cheap credit to become homeowners. That's why policymakers must also focus on improving households' ability to buy homes by encouraging household income growth. In fact, Canada's structural affordability problem has as much to do with weak income growth as it does with runaway house price growth. Improved income growth would narrow the housing cost gap, helping not only prospective homeowners but renters as well. In practice, that means significantly increasing Canadian productivity – the value of an hour of work.
What would a productivity-focused agenda look like? It would mean reinvesting in, or at least exiting, Canada's most productive industries, such as mining, natural gas and energy. It would also mean encouraging investment in productive industries, such as technology, to spur growth, rather than relying largely on government spending. Programs to improve the skills of workers to make them more competitive in the global marketplace would be very helpful. The same goes for steps to curb excessive taxation and regulation of sectors with high growth potential, and to reduce long-standing trade barriers between provinces.
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Our immigration policies can also be redesigned to increase productivity. At the moment, we are failing to adequately integrate the large number of new immigrants into the labour market or to attract workers to value-added industries. Canada is rightly extremely attractive to people from all over the world and we should select those who have the skills needed to further expand our productive capacity.
Measures like these are long overdue to raise Canadians' living standards to a level where affordable housing does not place a massive burden on family finances. While Canada is one of the best countries to live in, it does not even rank in the top 10 in productivity compared to other countries in the Organisation for Economic Co-operation and Development (OECD). This productivity level is also an indicator of how well Canada fares – and poorly – in a competitive environment where productivity is used as a measure of GDP per capita.
Canada ranks 18th, with a GDP per hour worked of 42.5 percent of Ireland's 1st-ranked GDP. Compared to the United States, Canadian productivity has declined by nine percent between 2000 and 2022 and is now about 72 percent of U.S. productivity. This is a major reason why Canadian income levels are much lower than average American income levels today, while they were at the same level in the 1960s and 1970s.
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We can do it again. A productivity-focused policy agenda, complemented by continued housing construction, is the best way to ensure the next generation of Canadians can afford to own their own home – while also being the best way to strengthen the economy and living standards for all.
Carl Gomez is Chief Economist and Head of Market Analysis at CoStar Group Canada
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