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A person walks by a house for sale on Major Street in Toronto, on Oct. 26, 2022.Eduardo Lima/The Globe and Mail

The belief that real estate is the greatest way to generate wealth has given us a housing market in which only one in three households can afford a property.

Housing is turning into a wealth feedback loop. Rising prices mean more wealth for current owners that they can share with family and less affordability for those trying to get into the market on their own.

A crucial spring in Canadian real estate history is about to begin. If the green shoots of a recovery we’ve seen so far keep growing, some of today’s renters may permanently be excluded from home ownership. Worse, the high cost of rent poses the risk they’ll never save enough to compete with the wealth of owners.

A recent report on renters from RBC Economic lays out the problem for the housing market. It says that 68 per cent of all Canadian households can’t afford to buy a home right now based on their earned incomes alone, and that includes some who already own. High rental costs mean even some upper-income Canadians may never be able to save enough to buy a home.

Back in 2005, half of all households earned enough to buy a home using their income alone. Rising prices, high mortgage rates and insufficient new home construction have worsened affordability, but that’s only one aspect of the problem. Another is the plight of the renter.

The RBC report says the economic upheaval of the past few years has left renters in much worse financial shape than owners of property. This threatens the ability of renters to build wealth and thus could worsen the kind of economic inequality we’re increasingly seeing. RBC notes that almost half the household wealth generated in the past 30 years was driven by residential real estate.

The initial stages of the pandemic were helpful for the wealth of both owners and renters – money was saved, and investments gained value. RBC says net worth jumped 34 per cent for owners and 23 per cent for renters with no real estate assets between the period immediately before the pandemic and the second quarter of 2023.

From there, things went financially downhill for renters. Their net worth suffered, along with that of owners, but surging rental costs were a factor as well. RBC says renters spent nearly 9 per cent more than they earned in household disposable income last year, while homeowners saved 7 per cent of take-home pay.

Renters tend to have lower household incomes on average than owners – that’s why they struggle more to afford the cost of housing and other living expenses. RBC says renters spent an average of 25 per cent of take-home pay on housing costs, including utilities, in 1999, compared with 23 per cent for owners. In 2022, renters spent 29 per cent of after-tax pay on housing, while owners spent 21 per cent.

It used to be that renters were mostly considered homeowners-in-waiting. Now, not so much. “Lower earnings and higher allocations to housing make it exceptionally difficult for renters to save for a down payment – a crucial step in the path to wealth accumulation,” RBC economist Carrie Freestone writes in the report.

The home ownership rate in Canada is still high at about 66 per cent. Holding the line on ownership will depend to some extent on how many new homes get built.

The news here is middling. TD Economics says housing starts picked up last month from the January level but are forecast to decline this year because of weak home sales overall.

Mortgage rates and prices are two other big factors in affordability. Fixed-rate mortgages have come down a little from peak levels and could decline further if inflation eases. Theoretically, this would be helpful for renters and others struggling to afford to buy a home. But lower mortgage rates are likely to fuel activity among people who can afford to buy, thereby driving price gains that offset lower rates.

The average rent for units of all sizes and types was up 10 per cent in January on a year-over-year basis to $2,196, says. Don’t expect renters moving up to ownership to be well represented among the buyers this spring. We are building ourselves a housing market ruled by people using their own home equity to buy additional properties or give money to their children so they can also buy.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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