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Couple looking at new house
• Oct 5, 2022

Housing affordability has always been a hot button issue in Canada, and the relationship between rising home prices and wealth inequality in Canada is a complex issue.

To go deeper into the story behind the numbers, TD Economics recently published its latest report, entitled "Digging Beneath the Surface: Is Housing Perpetuating a Wealth Divide in Canada?" To read the full report, click here.

In a Q&A below, Francis Fong, Managing Director and Senior Economist at TD, explains why wealth inequality in Canada isn't just a question of rich vs. poor – it's about homeowner vs. non-homeowner.

When you started doing research for this report, did you go in with a hypothesis? And did the results differ from what you expected?

Our goal was to disentangle to what degree deteriorating homeownership affordability has worsened or contributed to wealth inequality in Canada. We were surprised that the research showed wealth inequality has not increased in Canada, and that homeownership was one of the big reasons why. However, most things in economics are not that simple.

Digging deeper into the data, we found that while homeownership rates among the younger age brackets – particularly Millennials and Generation Z – were similar to prior generations, they were more likely to have higher incomes and/or benefit from a transfer of wealth from parents and friends relative to the generations preceding them.

The market is increasingly out of reach for those without these advantages. And, for those with these advantages, we found that debt levels are still higher than previous generations.

The current environment of falling home prices is unlikely to make things better. In fact, the rapid rise in interest rates is causing a decline in affordability rather than an improvement. So, we are in a situation where the line between homeowner and non-homeowner has thickened.

Why is housing creating a wealth divide between homeowners and non-homeowners?

In Canada, home prices have largely been a one-way trade for a couple of decades. Even incorporating the recent decline, home prices have more than tripled since 2002, with only short, intermittent periods of weakness. Housing is unique because it's the only non-financial fixed asset that appreciates over time, while you’re consuming it, unlike a car, which typically depreciates in value after you buy it. You get to have your cake and eat it too.

Economists often refer to the dynamics as “forced savings.” The homeowner simultaneously accumulates wealth as home prices rise because they are paying down their mortgage, and with each payment, their equity goes up. On top of that, there are many different subsidies and tax incentives that exclusively benefit homeowners and where there’s no directly comparable mechanism for people to build wealth who are non-homeowners.


The data in this survey spans from 2005 to 2019. How has the COVID-19 pandemic, high inflation and rising interest rates affected the housing market from 2020 to present?

Previously, we saw home price pressures really focus in the major metropolitan areas. With COVID and the rise of remote work, we've seen those price pressures migrate to places outside of major metropolitan areas where people said to themselves, "I can move two hours away from Calgary, find cheaper housing, and bigger housing, and I can still keep my job."

What that does is price out local homeowners in their home markets because you have all these people who are now willing to pay a higher price for those same houses. So, now we see price pressures affecting a wider breadth of Canadians than we saw in the past.

Then you have the situation of the high inflation, high interest rate environment we're in today. Naturally, we've seen a correction in home prices. But affordability hasn’t necessarily gotten better with the home price decline because interest rates are so much higher than they were just a few months ago. We estimate that given where home prices and interest rates were at the start of all this, you would need a price decline of roughly 10% for each percentage point increase in interest rates.

We've now seen mortgage rates rise by more than 2 percentage points, and home price declines haven’t been that high. With rising interest rates, we're going to have a parallel decline in home prices that keeps affordability at roughly the same place. Quite simply, house payments are going up while the cost of buying a house isn't coming down enough to level things out.

All said, affordability isn’t getting any better for people. If anything, it might even be a bigger challenge as the higher interest rates may prevent people from moving to a new home if they want to upgrade. Then you have a situation where everyone is staying put, and that isn’t freeing up more supply for people to move into.

If the same report was published with current data up to 2022, do you think the report's conclusions would change?

I don't believe they would, particularly from an inequality perspective. While home price declines, such as they are, would notionally contribute to narrowing that gap between homeowners and non-homeowners, financial markets have also been hit quite hard. Non-homeowners depend proportionally more on financial assets than real estate, thus, the inequality picture should notionally remain.

Why is housing accessibility and affordability an important issue to address?

Our report's findings suggest that the imperative of addressing housing affordability and accessibility takes on a much higher level of criticality. Not only is it about meeting a basic need and a basic right, it's also about keeping our inequality picture from deteriorating as it has in other jurisdictions, and all of the social issues that come with that.

In the immediate term, we have a clear mismatch between demand and supply that needs to be addressed with more supply, more specifically, supply that meets the entire spectrum of housing need. In the longer term, it asks the question of what we ought to be doing about inequality in Canada when there are limits to where homeownership rates can reach, given where affordability is, and the degree to which we have depended on real estate to keep a lid on inequality overall.

Addressing both short and long-term housing issues is critical not only for ensuring people have this basic right of having a home to live in, but also to preserve the narrative that Canada is an equal society where everyone has an equal opportunity to "make it." Housing has historically played at least some part in that narrative, and that's now at risk.


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