The average household in the United States and Canada spends around one-third of its income on housing. Two-thirds of households own their home, and three-quarters of homeowners are paying off a mortgage. So, the price of a house is a big deal.
What is the average price of a house today?
The average price of a house in the first three months of 2023 was US$512,500 in the United States and C$662,143 (or US$489,400) in Canada. At these prices, the average house equals 6.5 years of income in the United States and 8.6 years of income in Canada.
How have house prices changed over the past 30 years?
Figures 1 and 2 answer this question. House prices have increased.
Have house prices increased by more in Canada than in the United States?
Figure 3 answers this question.
In this graph, Canadian prices are converted to U.S. dollars. House prices have increased by 4.3 percent per year in the United States and by 5.5 percent per year Canada. Canadian prices were lower than U.S. prices before 2009, but since that year, prices in the two countries have been similar.
Have house prices increased by more than incomes?
We can determine whether house prices have increased by more than incomes by looking at the ratio of house prices to incomes. Figure 4 shows that in the United States, that ratio has fluctuated around an average of 6. House prices were rising faster than incomes when the ratio was rising and were rising by less than incomes when the ratio was falling. In the eleven years from 2011 to 2022, the increase in house prices outpaced income growth, and the ratio increased from 5.3 to 7.0.
The situation is very different in Canada, as Figure 5 shows. The ratio of house prices to income has trended upward from less than 4 in 2000 to almost 10 in 2020.
Figure 6 compares the ratios of house price to income in the two countries.
Have house prices increased because supply decreased?
The main influence on supply is the number of building starts. Figure 7 shows the data for the two countries.
This indicator of supply does not look like it is a good explanation for price changes. Canada had the longest and fastest period of rising prices along with the larger number (per thousand of population) of housing starts. And when U.S. house prices were falling, U.S. housing starts were also falling.
Figure 8 shows scatter diagrams of housing starts and house prices and confirms the absence of a clear relationship between these two variables.
Have house prices increased because demand increased?
Population growth is one influence on demand, and it explains some of the price movements. U.S. population growth ran at an annual rate of 0.85 percent over the past 30 years, and 0.58 percent over the past 10 years. Over these same periods, the Canadian population grew by 1.08 and 1.22 percent.
Growth in demand driven by population growth is a major reason why house prices increased by more in Canada than in the United States.
Mortgage interest rates are another influence on demand, and low real mortgage rates bring a greater demand and higher prices. Figure 9 shows this influence. The U.S. and Canadian data show a clear inverse relationship between real mortgage rates and the house price to income ratio. But many other forces are at work.
Where are house prices likely to go in 2023 and 2024?
Down? High and rising real mortgage rates will keep demand in check and might lower prices. If homeowners expect lower prices, they will want to sell before prices fall, which increases supply and reinforces downward pressure on prices.
Up? Population increase will keep demand rising and might raise prices. If homeowners expect higher prices, they will want to sell after prices rise, which decreases supply and reinforces upward pressure on prices.
Down is the best bet.
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