If you're over 45, the swooping rise in Canadian real estate prices over the past decade has been a godsend for your personal finances. If you're under 30, it has been a hellish nightmare.
Older Canadians who already own homes will cheer the latest figures, published Monday, that show the real estate market rebounded strongly from its winter doldrums and that more strong gains may lie ahead. Younger Canadians, looking to get into the market, will curse their bad luck.
They have good reason to be depressed. Over the past 10 years, the housing market has driven a wedge between generations. It has transformed many middle-aged and older homeowners into millionaires while leaving their children gasping at the prospect of taking on enormous mortgages to shoulder their way into the market.
It's time to ask whether a system that is so blatantly ageist needs fine tuning. A soaring real estate market is, among other things, a highly efficient machine for transferring wealth from the young to the old.
A chart from the Bank of Canada's Financial System Review, published last week, demonstrates the issue nicely. It shows that an average family could have bought a house for roughly 2.5 times its disposable income for much of the 1980s. A decade later, home prices had inched up to between 3 and 3.5 times disposable income. Then, beginning about 2000, the world changed and home prices shot higher and higher in comparison to our paycheques. Home prices now stand at nearly five times disposable income.
The practical translation of those numbers is clear: Mr. and Mrs. Average, who bought their house back in 1994, can now count on selling that house to their younger counterparts for a price that is roughly 50 per cent higher than they paid a couple of decades ago, even adjusted for wage increases and inflation gains in the interim.
To be sure, today's low interest rates make stratospheric prices easier to carry than they once would have been. But low interest rates aren't a panacea. They actually increase the fragility of the current market, since any move upward in rates would leave many mortgage holders struggling to keep up with their payments.
What's more, low interest rates, by themselves, can't explain Canada's red hot housing market. Rates have fallen all around the world, but home prices haven't shot up by the same degree all over the globe. Canada's experience has been unusual, according to a report last month from the Organization for Economic Co-operation and Development, which shows that the recent increase in home prices compared to household incomes in Canada has exceeded that in every other developed nation except for France and Belgium.
Canada's housing euphoria is likely to have long-term effects on the personal finances of younger Canadians. For starters, a 25-year-old buying a house today has to hope that interest rates don't spike higher and crush the value of her investment.
Even if rates stay low, she's unlikely to experience the same wealth-boosting effects from real estate as her parents did, unless home prices continue to spiral higher and higher against incomes – an unlikely outcome given that the current price-to-income ratio is already well above historical norms.
Canadians' current obsession with real estate didn't begin as a way to enrich baby boomers while saddling Gen Y with big debt, but that is the way it has turned out. It's time to change the prevailing mentality, which tends to view a rise in home prices as a win for everyone.
We should keep in mind that pricier real estate is actually a tax on a group that we can't ignore: our young people. For them, a decline in housing prices, or even a sustained plateau, would be reason to applaud.