Canadian Real Estate Wealth Went Vertical, and That’s A Problem: BMO

Canadian real estate is increasingly flashing warnings after detaching from incomes. Sal Guatieri, a senior economist at BMO, found another one — home values as a percent of income. The indicator calculated by Statistics Canada (Stat Can) shows home prices climbing much faster than incomes. It almost looks like a plotting error, as homes continue to earn more than the people in them. 

Canadian Real Estate Is Now 562% of Disposable Income

Canadian real estate wealth as a share of disposable income launched higher. Stat Can data shows it hit 562.2% in Q4 2021, up 23.9 points from the previous quarter. Compared to a year ago, the share gained a whopping 86.2 points, almost a whole year of income. It’s not just frothy cities like Vancouver, but right across the country. 

“If you need more evidence that Canadian house prices have become detached from one key fundamental driver, income, take a look at the slope of the series in the chart,” says Guatieri.

Canadian Real Estate As A % of Income

The share of residential real estate assets as a percent of disposable income in Canada.

Source: Statistics Canada; Better Dwelling.

“It shows the value of household real estate assets, relative to after-tax income, went nearly vertical last year,” he explains. Rapid credit expansion is fueling higher home price growth, making up for a lack of income. Canada has never seen anything like this.

The Vertical Climb Doesn’t Include The Record Price Growth

The recent vertical rush doesn’t even capture the record price growth over the past two months. “And, this is before a record price increase of nearly 7% in the first two months of this year. The typical family doesn’t see that much increase in income in two years,” he said. 

Disposable incomes have flatlined recently, while home prices only surged faster. Such rapid price appreciation isn’t just setting off alarm bells at BMO either. Recently Oxford Economics called out the massive disconnect between fundamentals, forecasting falling prices. They warn there is a small possibility Canada tries to extend this price rally. If they do, the country is beginning to flirt with the possibility of a “financial crisis.” 

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