Part 1 - In depth: Here's how badly home price growth has outstripped national average weekly earnings in Canada
Jul 30, 2019
Erik Fertsman
Asset price inflation in Canadian real estate has massively outstripped average weekly earnings for the majority of Canadians... and many don't even realize it (or, maybe, want to realize it).
I remember when I was a kid, I witnessed a hard-working couple enter home ownership. Both heads of the household worked steady jobs, had some student loan debts, but made a decent enough income to qualify for a mortgage. We're talking about the mid 1990s, here. Back then, the home they bought was just around the $120,000 CAD range. Within a short period of a decade, that home reached $220,000. It turned out to be quite the investment.
Due to unforeseeable circumstances, I remember a decision was made to sell the home, but a new couple that wanted to buy the home couldn't qualify for a mortgage. It was odd, because the buyers worked together with the folks who were now looking to sell. It was a wonder why the same two families - financially comparable in many ways, I thought - had two different outcomes. It seemed unfair to see such variation.
As I grew up, I began to acclimatize to price growth, and to the reality that, as time passes, you need more money to buy the same thing. This effect is called "inflation," which causes the price of things to go up over time, and for some things it happens faster than others. Today, a mere 25 years later, that dwelling that I mentioned above costs over $300,000.
Unfortunately, as the story brings to light, wages have not experienced the same or greater level of inflation as home prices. This has been causing a whole host of issues in Canada, most of which has gone unnoticed and unstudied. What's more puzzling, however, is that unemployment is at historical lows in Canada, but we have very little wage growth.
Just how badly home prices have outpaced wage growth?
I've managed to put together a chart that demonstrates just how bad things have gotten in Canada, at the national level. The chart combines the Teranet-National Bank of Canada Home Price Index with Statistics Canada's seasonally adjusted data for average weekly earnings. I've taken the data and generated the percentage change from the previous year. The result? A fancy year-over-year growth perspective ranging over 15 years:
This perspective reveals just how epic home price growth has been in Canada. The story I told you took place between 1995 and 2005, and while we don't have the data for the 90s above, we can clearly see just how far home prices outpaced wages during the run-up to the 2008 financial crisis. Even after the financial calamity, home price growth quickly rebounded as high as 14 percent, while average wage growth continued to hover between 1 and 4 percent.
You can see how home price growth has occasionally returned to meet the wage growth average. But this dance is historically short lived; home prices quickly go in a direction of their own. In case you have been wondering why housing affordability is a thing, and why you're feeling it... now you know why it's a thing. Wages are simply not keeping up with home prices, which impact rent prices, lease prices, building costs, repair costs... you name it.
Only in the last year has home price growth come back in line with national wages. But looking at the data, this is bound to be a temporary thing, as underlying fundamentals will either send home price growth plummeting or skyrocketing... that's the way it's always been.
Wages in Canada by Statistics Canada's classified businesses
Of course, the average national wage growth does not do justice to the reality many folks are currently facing. Things get a bit more bleak when you begin to breakdown wages by Stats Can's classified business categories. Here's the data, take a look:
The national average weekly earnings as of May, is about $1,031 CAD. But, there's plenty of wages that are above or below this figure. In some cases, quite a bit lower or higher.
The highest paid workers in Canada are those working in mining, quarrying and oil and gas exploration. These are the folks who bring home the big bucks. They are joined by those who work for utilities and company managers. On average, these folks bring in anywhere between $1,500 and $2,300 per week (before taxes!).
The lowest paid workers are those who work in accommodation and food services, and arts, entertainment, and recreation. On average these folks bring in between $400 and $600 per week. That's 3 to 4 times less than those wealthier workers, and at least half as much as the national average!
Yep, I'm honestly not sure how these lower paid workers are living, not to mention how they're going to live moving forward. They're probably not living, but are just trying to survive.
How the lowest nationally paid workers did against home prices
So, here I've stacked up the lowest national average weekly wages and their growth rates over the last three years, together with the national home price growth rate. It's not pretty:
If we remember the 15 year chart, we know that home price growth outside of the 2008 financial crisis has never gone into the negative. Yet, between 2016 and 2017 alone, wage growth for the lowest paid workers regularly saw negative growth rates. Meanwhile, home prices were seeing double digit growth rates. This is truly astonishing.
Only in the last twelve months have the lowest paid seen wage growth come more in line with home price growth. But, even here, we're very close and, in some cases, into the negative. Hello, the data is right here! Who is looking out for these people?!
How the highest nationally paid workers did against home prices
You can't blame the wealthier workers, either. Stacking up the highest national average weekly wages and their growth rates over the last three years against national home price growth doesn't tell a very good story, either.
In fact, higher wage earners have experienced significant wage growth volatility. Sure, they've experienced higher wages and, at times, much higher wage growth than lower wage counterparts. But, this has come with steep negative growth, as well.
In the chart above, pay attention to the solid horizontal black line that represents the 0 percentage growth rate; all three wage categories have repeatedly crossed this line on a regular basis, while home price growth has not. What's more, wage growth has spent very little time trending above home price growth. Even the top income earners based on Stats Can's classified categories are falling victim to asset price inflation in housing.
How government, financiers, and real estate workers did against home prices
You might ask, how did those working in government, real estate, and finance do? Let's be honest, these are the folks who are on a mission to ensure that home prices keep growing at all costs. Here's the chart for these workers:
As you can see, even finance, insurance, and real estate wage growth has struggled to match the almighty home price growth rate! I keep wondering if they're in denial, or if they're coming home and asking themselves what the heck is going on.
Over the past little while I've been writing about the sources of home price inflation. Getting deep into the data is the only way to really understand what's really going on. There's a number of factors involved that are pushing up home prices, but I put particular emphasis on commercial bank credit, as I
wrote here. Why? Because banks are providing a massive amount of credit for home buyers. And this money is created
ex nihilo.
Cover image source: Nikko Macaspac
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