Canadians have seen their wealth surge through a simple act—just paying their mortgages. The problem, according to the country’s largest bank, is that one person’s inflated housing wealth is another person’s hurdle to shelter. RBC warns the issue is now so bad, the vast majority of people will never be able to afford to buy at today’s prices, as values are rising multiples of disposable income. Good news for those who already own, but a huge problem for young adults that now find themselves locked out of shelter and wealth, while housing sucks up investment from virtually every other area of the economy.
Canada Concentrated Wealth In Homeownership
Canada’s real estate bubble has concentrated wealth in a single area of the market. According to the bank’s analysis, homeowners have seen their net-worth rise 9x disposable income over the past three decades, and 13x since Q4 of 2010. At the same time, renters saw just 3x and 3.6x growth over the same period.
“Home ownership is the primary method of accumulating wealth in Canada with nearly half of the household wealth amassed over the past three decades driven by residential real estate,” explains Carrie Freestone, the RBC economist who authored the report.
Housing wealth being this concentrated is typical in older, or less advanced economies. In contrast, the US became world-renowned for its housing concentration in 2008. The value of all housing represented 31% of household net worth, and currently sits at just 23% of total net worth.
Most Canadians Could Never Afford A Home At Today’s Prices
Renters are seen as less affluent, helping to dismiss the wealth gap. Lower income households would obviously see smaller increases in wealth. That’s not the case today, where even higher income households are now locked into this demographic. All lower income households rent, but not all renters are lower income in Canada.
The vast majority of Canadian households could not afford to buy a home based on income. As a result, the bubble didn’t just lock younger adults out of shelter—it also locked them out of the bubble’s wealth accumulation.
“… home ownership has never been less accessible. More than two-thirds (68%) of Canadian households can’t afford to purchase a home based on earned income alone,” warns Freestone.
Without the housing boom, in a stagnant market for both equities and housing—renters and owners aren’t that different. The bank notes that in 2020, household savings was 22% for those who rent vs a nearly negligible 24% for homeowners. Both were assisted with government grants and payment relief to help.
Post-pandemic that isn’t the case. Stimulus pumped into the housing market began to widen the gap towards the end of 2020, with renters observing negative wealth in 2021 and beyond.
“Canadian renters are devoting a greater share of their take-home pay to housing costs, much more than homeowners. Many renters may not be able to enter the house housing market with the limited scope to save for a down payment. As a group, renters spend more than they earn,” she warns.
Adding, “this threatens renters’ path to accumulating wealth—which could exacerbate inequality over the longer term.”
The distortion of Canada’s housing market is a double-edge sword: on one hand, the problem appears to be that renters are locked out of the housing-based wealth that was generated. As a result, those who rent see their savings turn negative as they generate wealth for others, while also not benefiting from boosted values.
On the other hand, the state-backed market created circumstances where housing is perceived as risk free. As a result, capital is being diverted from productive areas of the economy. Short-term gains produce a handful of new owners, but it also creates even more long term-damage. Canada is already close to logging a Lost Decade—but that doesn’t mean it won’t try for a lost Quarter-Century.
