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BMO Uncovers Simple Reason Canadian House Prices Now 46% Higher Than U.S.

The Canadian economy’s addiction to real estate has hit a new high.
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A new report from the Bank of Montreal highlights just how intensely dependent on the housing market Canada’s economy has become.

Unfazed by a global pandemic, Canada’s residential real estate sector has soared from strength to strength and now accounts for 9 per cent of the country’s economic output, BMO chief economist Douglas Porter found.

“To say ‘that’s an all-time high’ would be an understatement,” Porter wrote.

That’s well above the historic average of around 6 per cent, Porter noted, and it’s twice the share of the economy than housing comprises in the U.S.

BMO Economics

So is Canada massively overbuilding houses? Apparently not. Porter found the main reason real estate is such a huge part of the economy is that people are spending a lot more on houses here than elsewhere.

In fact, at this point, the cost of a house is 46 per cent higher in Canada than in the U.S., when adjusted for purchasing power and exchange rates, Porter found.

BMO Economics

Porter lists off a number of possible reasons for this huge gap, including faster population growth in Canada, slightly lower mortgage rates, and a larger share of the population concentrated in the largest and most expensive cities.

But none of that seems to satisfy, and he settles on a different explanation.

“A much more fundamental answer may simply be that on balance Canadians have made a collective choice to allocate more resources to (and thus ‘consume’ more) housing than other countries,” he wrote.

In other words, we pay more for housing because we’re willing to ― because it’s worth it for us.

Watch: New floating real estate development offers $1.5-billion mega-mansions. Story continues below.

And if that’s the case, that may have to do with the fact that real estate has proven such a winning investment for so long in Canada.

Having avoided the U.S. housing bust of 2008, many Canadians came to see the country’s housing market as bulletproof ― a surefire long-term investment in a country that keeps upping its immigration levels while throwing roadblocks in the way of new construction.

In fact, even as Canada headed into a winter of lockdowns and even curfews in some places, confidence in the housing market soared to its highest level on record in the Bloomberg-Nanos consumer confidence index.

That may have to do with the fact the average resale price of a house jumped 17 per cent over the course of 2020, to a record high of $607,280. If the worst economic shock in decades can’t stop the housing market, what can?

Porter doesn’t see Canada’s obsession with housing as necessarily a bad thing ― just a consumer choice.

“Who is to judge if this type of consumption is better or worse than other forms of spending?” he asked.

However, he notes this type of consumption comes with a big asterisk: debt. Amid soaring house prices, Canadians have become among the most indebted people in the developed world.

“The focus will revert to this underlying issue when the pandemic eventually fades as economic concern number one,” Porter predicts.

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