Real Estate

Housing Affordability: Real Home Prices vs Real Disposable Income

Housing Affordability: Real Home Prices vs Real Disposable Income

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    In nesto’s comprehensive guide on housing affordability,  we explore the trends in home prices vs income, and how they impact housing accessibility for Canadians. Housing affordability is a crucial aspect of the real estate market, as it determines the extent to which borrowers can afford to purchase a home. 

    We will delve into the factors influencing home prices, the relationship between home prices and real disposable income, and provide insights on improving housing affordability. So let’s dive in and gain a deeper understanding of this important topic.


    Key Highlights

    • Factors such as real disposable income, mortgage rates, and housing market trends influence housing affordability.
    • Canadian home prices have grown at a staggering rate, outpacing real disposable income resulting in a significant gap between home prices and incomes, challenging many Canadians’ capacity to afford a home.
    • The relationship between home prices and real disposable income is a key factor in determining housing affordability. As home prices continue to rise, it becomes crucial for incomes to keep pace in order to maintain affordability.
    • Improving housing affordability requires a multi-faceted approach, including strategies such as building more homes, improving income levels, choosing affordable housing options, effective planning and budgeting, and implementing government policies and programs that support affordable housing initiatives.

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    Understanding Housing Affordability

    Housing affordability refers to the power of individuals and families to access and afford suitable housing options. It is a measure of the relationship between housing costs and household income, indicating the extent to which housing expenses impact a household’s budget.

    The housing affordability index is a commonly used metric to assess the affordability of housing. It measures the share of disposable income that a representative household would allocate towards housing-related expenses. The higher the ratio, the more challenging it is for individuals to afford a home.

    Importance of Housing Affordability

    Housing affordability plays an important role in society, directly impacting individuals’ quality of life, social mobility, and economic well-being. Affordable housing ensures that individuals and families have access to safe and suitable housing options, contributing to their overall stability and well-being.

    Furthermore, housing affordability is closely tied to socio-economic factors such as income inequality, poverty rates, and overall economic health. When housing becomes unaffordable, it can lead to a range of negative consequences, including increased homelessness, overcrowding, and financial stress for households.

    Ensuring housing affordability is a key priority for policymakers, as it is essential for creating inclusive and sustainable communities. By addressing housing affordability challenges, governments can foster social equity, economic growth, and overall societal well-being.

    Now that we have established the importance of housing affordability, let’s explore the trends in home prices and the factors that influence them.

    Understanding the Dynamics of Home Prices

    Home prices are influenced by many factors, including supply and demand dynamics, economic conditions, population growth, interest rates, government policies, and market speculation. The interplay of these factors can result in significant fluctuations in home prices over time.

    In recent years, home prices in Canada have experienced substantial growth, leading to concerns about housing affordability. According to the latest data, Canadian home prices have grown at a much faster rate than real disposable income. This has created a significant disparity between home prices and median household incomes, posing challenges for prospective homebuyers.

    Factors Influencing Home Prices

    Several factors contribute to the upward trajectory of home prices in Canada. Let’s examine some of the key drivers of this trend:

    • Supply and Demand Imbalance: Limited housing supply relative to strong demand can drive up home prices. Population growth, urbanisation, and limited land availability can contribute to this imbalance.
    • Low Interest Rates: Historically low interest rates have made borrowing more affordable, fueling demand for housing and driving up prices. Low mortgage rates have allowed buyers to qualify for larger loans, increasing their purchasing power.
    • Speculation and Investment: Real estate has long been seen as a safe investment, attracting both domestic and foreign investors. This investment activity can drive up property’s sold price, particularly in popular urban areas and desirable neighbourhoods.
    • Government Policies: Government policies, such as tax incentives and regulations, can influence the housing market. For example, initiatives to encourage homeownership, such as first-time buyer programs, can contribute to increased demand and price appreciation.
    • Economic Factors: Conditions, such as job growth, GDP growth, and inflation, can impact the housing market. A strong economy can stimulate demand for housing, leading to price increases for a number of households in an economic area.

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    Canadian Home Prices Have Grown Faster Than In The US

    When comparing Canadian and American real estate markets, it becomes evident that Canadian average home prices have experienced significant growth compared to their American counterparts. The disparity in home price appreciation between the two countries is staggering.

    According to data from the US Federal Reserve, as of Q2 2021, Canadian average home prices have risen by 139% since 2005, while the US has seen a relatively modest increase of 10% over the same period. This means that Canadian home prices have grown 13 times faster than in the US during this timeframe.

    The discrepancy in home price growth is not a recent phenomenon. It has been a long-term trend in Canada since 2005, whereas the US has only witnessed a more recent acceleration in home price appreciation. This vast difference in growth rates has resulted in a comically large gap between average home prices and incomes in Canada when compared to the US.

    Comparing Housing Affordability Trends Between Canada and the United States

    To gain a deeper understanding of the housing affordability situation, we can examine the relationship between real home prices and real disposable income in both Canada and the US.

    What is Real Disposable Income?

    Real disposable income refers to the amount of income available to individuals and households after deducting taxes and adjusting for inflation. It is a crucial factor in determining housing affordability, as it reflects homebuyer’s’ purchasing power.

    Real disposable income is a metric for assessing borrowers’ financial well-being and their ability to afford housing. It reflects the actual income available to households after accounting for changes in prices, enabling a more accurate assessment of affordability over time.

    Now that we understand the concept of real disposable income, let’s explore the relationship between home prices and this vital measure of affordability.

    Canadian Real Home Prices vs Income

    In Canada, real disposable incomes have increased by 46% since 2005, while in the US, they have grown by just 10% over the same period. Despite this growth, Canadian incomes have not kept pace with the rapid rise in home prices, leading to a significant disparity between the two. 

    While real home prices have outpaced real disposable income by a significant margin. From 2005 to Q2 2021, Canadian home prices have grown 64% faster than disposable income in the country. This means that the cost of housing has risen at a much faster pace than the growth of incomes.

    The disparity between home prices and incomes in Canada is striking. It highlights the challenges faced by Canadians in affording housing, as the cost of homeownership has become disproportionately larger compared to their income levels.

    On the other hand, the US has witnessed a different trend in the relationship between home prices and real disposable personal income.

    American Real Home Prices vs Income

    While home prices in the US have also experienced growth, it has been slower than Canadian home prices. In the US, real disposable personal incomes have actually grown 16% faster than home prices from 2005 to Q2 2021.

    This indicates a more balanced relationship between home prices and incomes in the US, with housing costs growing more sustainably relative to income growth. However, it’s important to note that recent data suggests home prices in the US have started to outpace income growth, albeit to a lesser extent than in Canada.

    The contrasting trends in house price to income ratio between Canada and the US highlight the unique challenges faced by Canadians in terms of housing affordability.

    Impact of Rising Home Prices

    As home prices increase, the cost of homeownership becomes more expensive relative to disposable income. This can make it increasingly challenging for individuals and families to afford a home, particularly for first-time buyers or those with lower income levels.

    The rapid growth of home prices, as seen in Canada, can lead to a significant affordability gap, where housing costs outpace income growth. This creates barriers to homeownership and forces individuals to allocate a larger share of their income towards housing expenses.

    Role of Income Growth

    Income growth plays a crucial role in determining housing affordability. When incomes grow at a healthy pace, individuals have a higher capacity to afford housing, even in the face of rising home prices.

    However, if income growth does not keep pace with home price appreciation, housing affordability is compromised. This is particularly problematic when home prices rise much faster than incomes, as seen in Canada. In such cases, homebuyers may face difficulties in saving for a down payment, qualifying for a mortgage, or managing housing-related expenses.

    A Look at Housing Affordability Through the Lens of Disposable Income

    Understanding how changes in disposable income can impact housing affordability is essential for policymakers, homebuyers, and individuals looking to improve their housing situation. 

    This substantial gap between home prices and disposable income in Canada highlights the challenges faced by individuals and families when trying to enter the housing market. It becomes increasingly difficult for Canadians to afford homes, leading to concerns about long-term economic impacts and the ability of future generations to access homeownership.

    Impact of Rising Disposable Income

    When disposable income increases, homeowners have a greater capacity to allocate a portion of their income towards housing expenses. This can improve housing affordability, as higher incomes provide more options and flexibility in terms of housing choices.

    Increased disposable income can also enable homebuyers to save for a down payment, qualify for larger mortgages, and afford housing in desirable locations. It enhances borrowers’ purchasing power and expands their homeownership opportunities.

    Challenges of Stagnant Disposable Income

    On the other hand, stagnation or slow-growth in disposable income can pose challenges for housing affordability. If income levels remain relatively unchanged while home prices continue to rise, individuals may find it increasingly difficult to afford suitable housing options.

    In such circumstances, individuals may have to allocate a larger portion of their income towards housing expenses, leaving less room for other essential needs and financial goals. This can lead to financial stress, reduced savings, and limited opportunities for wealth accumulation.

    Improving housing affordability requires a multi-faceted approach that addresses both home prices and disposable income levels.

    Improving Housing Affordability: Strategies and Solutions

    Addressing the housing affordability issue requires a multi-faceted approach. Here are several strategies and solutions that can help improve housing affordability:

    • Building More Homes: Increasing the housing supply can help alleviate the demand-supply imbalance and stabilise home prices.
    • Improving Income: Focusing on policies that promote economic growth, higher wages, and job creation can enhance individuals’ purchasing power and improve affordability.
    • Choosing Affordable Housing Options: Exploring alternative housing options such as shared ownership, co-housing, and affordable housing initiatives can provide more affordable homeownership opportunities.
    • Planning and Budgeting: Implementing effective financial planning and budgeting strategies can help individuals save for down payments and manage housing costs.
    • Government Policies and Programs: Governments can introduce policies and programs that incentivize affordable housing development, provide financial assistance to first-time homebuyers, and regulate the housing market to ensure affordability.

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    Building More Homes

    One of the key strategies to address housing affordability is increasing housing supply. Building more homes, particularly affordable housing units, can help alleviate the pressure on housing prices and provide more options for prospective homebuyers.

    Investments in housing infrastructure, streamlined approval processes, and collaborations between the public and private sectors can facilitate the construction of affordable housing. This can help meet the growing demand for housing and ensure a more balanced market.

    Improving Income Levels

    Raising income levels is another crucial aspect of improving housing affordability. Policies that promote job growth, higher wages, and skills development can enhance individuals’ purchasing power and enable them to afford housing.

    Efforts to reduce income inequality and support low- and middle-income households can also improve housing affordability. This includes initiatives such as minimum wage increases, targeted social programs, and incentives for employers to provide competitive wages.

    Choosing Affordable Housing Options

    Opting for affordable housing options, such as cooperative housing, rental housing, down payment assistance programs or shared ownership models, can also enhance housing affordability. These alternatives provide individuals with more flexibility and lower upfront costs compared to traditional homeownership. 

    Planning and Budgeting

    Effective planning and budgeting are essential for improving housing affordability. Creating a realistic budget, tracking expenses, and identifying areas where savings can be made can help individuals optimise their financial resources.

    Prioritising housing-related expenses, such as mortgage payments, property taxes, and maintenance costs, can ensure that individuals can meet their housing obligations while maintaining financial stability. 

    Government Policies and Programs

    Government policies and programs play a significant role in shaping housing affordability. Implementing measures such as rent control, affordable housing subsidies, and tax incentives can help mitigate the impact of rising home prices and promote affordable homeownership.

    Engaging in comprehensive urban planning, zoning reforms, and land use policies can also contribute to creating sustainable and inclusive communities. Governments can collaborate with stakeholders to develop innovative solutions that address different regions’ and demographics’ specific housing needs.

    By implementing a combination of these strategies, stakeholders can work towards improving housing affordability and creating more equitable housing opportunities for all Canadians.

    The current rate hikes by the Bank of Canada (BoC) have continued to burden homeowners with heftier monthly payments month over month – possibly causing them to reevaluate their homeownership.  Many financial experts suspect that past rate tightening by the BoC could cause a slew of home sales in the coming months by both homeowners and investors.

    Finding the Best Mortgage Rate Can Improve Your Financial Situation

    Securing a favourable mortgage rate is one aspect of improving housing affordability. Finding the best mortgage rate can lower monthly mortgage payments, reduce interest costs over the life of the loan, and improve overall affordability.

    To find the best mortgage rate, individuals should shop around and compare offers from different lenders. It’s essential to consider factors such as mortgage interest rates, mortgage terms, set up fees, repayment options and prepayment privileges . Consulting nesto’s mortgage experts can provide valuable insights and help individuals navigate the mortgage market.

    Potential homebuyers and homeowners alike should strive to improve their credit score, as it plays a significant role in determining mortgage rates. Paying bills on time, reducing debt, and maintaining a healthy credit history can boost creditworthiness and increase the likelihood of securing the best mortgage rate from prime lenders.

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    Frequently Asked Questions

    Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.


    How do home prices relate to real disposable income?

    Home prices and real disposable income have a complex relationship. When home prices rise at a faster rate than disposable income, housing becomes less affordable. Conversely, if disposable income grows at a higher rate than home prices, housing affordability improves.


    What can I do to improve housing affordability with my current income?

    There are several steps you can take to improve housing affordability with your current income. These include budgeting effectively, exploring affordable housing options, considering shared ownership models, and seeking government assistance programs.


    How has the relationship between home prices and disposable income changed over the years?

    The relationship between home prices and disposable income has become increasingly strained in many markets. Rapid home price growth, particularly in relation to income growth, has led to a significant affordability gap in many regions. This has created challenges for individuals and families looking to enter the housing market.

    Final Thoughts

    Housing affordability is a pressing issue in Canada, as home prices have outpaced real disposable income, creating significant challenges for prospective homebuyers. Understanding the housing market dynamics, the relationship between home prices and real disposable income, and implementing strategies to improve affordability is needed for long-term sustainability for Canada’s socio-economic wellbeing.

    By building more homes, improving income levels, choosing affordable housing options, planning and budgeting effectively, and implementing government policies and programs, we can enhance housing affordability and ensure that all Canadians have access to suitable and affordable housing.

    At nesto, we understand the importance of housing affordability and are committed to empowering borrowers with the knowledge and tools they need to navigate the complex world of mortgages. Reach out to our mortgage experts for personalised guidance and support on your homeownership journey.


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