Canadian home prices have been growing at a breakneck speed, and incomes aren’t even close to keeping up. Organisation for Economic Co-operation and Development (OECD) numbers show Canada topped the house price-to-income index.
House Price-to-Income Ratio Definition
The house price to income ratio is a basic affordability measure, to see if incomes are keeping up. To get the ratio, they take the cost of a median home, and compare it to median income.
- The lower the ratio, the better income growth is doing relative to house price growth.
- The higher the ratio, the worse income is doing compared to house price growth.
Lower ratios are more likely to support home prices, since incomes can more easily carry them. Generally high ratios are only seen in bubbles and developing nations.
House Price-to-Income Ratio Methodology
Reading the index put out by the OECD needs a quick explainer, because it’s not a straight ratio.
- The index is set at 100 for 2015, not the actual ratio. They’re assuming that 2015 was a generally accepted normal year. The increase or decline is relative to that year. For example,
- if the index hits 120, it means home prices grew 20% faster than income from that period.
- If it drops to 90, it means incomes grew 10% faster than home prices (or home prices fell) from that year.
House Price-to-Income Ratio Ranking of OECD Countries
Canada’s house price-to-income ratio is the highest in the world – by a large margin.
|OECD – Total||106.23|
For context, the U.S. is at 109.16, which means the gap between housing and income grew at 40% of the rate of Canada. The UK, which is being called a “bubble on a bubble,” sat at 107.82. There’s undeniably a lot of home price growth in Canada, or relative income stagnation – your pick.
Canada House Price-to-Income Change
The good news is Canada’s ratio has begun to stall. In Q4 2018, the ratio only grew 0.02% from the quarter previous.
Canada’s gap between home price and income growth dwarfs any other developed country. Over the past 3 years, Canadians have seen prices soar over 20% faster than incomes have been able to grow. Home price growth is cooling in the first quarter of 2019, likely to bring the ratio down in the next report. However, it’s still a pretty big gap created over the past few years.
Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)
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