Why homes cost so much more in Canada (compared to U.S.) ?

No idea if the article below is supposed to be justifications for homes to cost so many times more in Canada as compared to U.S. ? On the surface, I find the reasoning somewhat lame …

For example, the author argues,

1. There’s the exchange rate difference — now and when construction was initially carried out.

– The exchange rate is almost at par now, and whatever difference that existed in the past is immaterial because (see 2),

2. There are construction material differences (i.e., perhaps the most apparent being alternative HVAC systems to deal with the more frequent cold in the north versus the prevalent heat in the south).

– If you know what constitutes materials cost (and labor cost) in home building, you’d know these costs are very insignificant in relation to the prevailing home prices today. Would you be surprised if I tell you it costs less than $250,000 in materials and labor to build a so call “luxury” home  in Toronto that sells for $1.5 to $2 millions ?

Now you see why things like exchange rate and materials cost are no good reason for homes to cost so many times more than those in the U.S. ? However, this doesn’t mean there will be an imminent collapse of home prices.

Remember, nothing is certain except for death and taxes.  There is a chance for the existing “bubble” to transform into “nothingness” as long as the economy and market situation permit it. In another word, the “bubble” may not burst but Canadian as a whole must earn a lot more than our neighbors down south in order to sustain the kind of  home prices we have today, theoretically speaking.

Do you see that happening ? Otherwise, Canadians will be enslaved by homes cost just like most Asians do, where a tiny little apartment costs a few millions dollars such as in Hongkong or Tokyo … Not pretty, I say.

I’d leave the rest for you to check it out: –

House depicted above will cost $15,000-$20,000 to frame up at today’s rates.

Ted Torrence
Custom Home Guru

There are two ways to lower the home-price-to-average-earnings ratio

ALEX CARRICK

Chief Economist, CanaData

Previously, I’ve written that there is concern home prices in Canada may have become considerably more expensive than in the United States.

This observation, if it’s true, is one justification for arguing that the Canadian real estate market may be floating into “bubble” territory.

For a variety of reasons, a comparison of home prices between countries can be problematic, even when the economies are as similar as they are in our two nations.

There’s the exchange rate difference — now and when construction was initially carried out.

There are construction material differences (i.e., perhaps the most apparent being alternative HVAC systems to deal with the more frequent cold in the north versus the prevalent heat in the south).

There are also type-of-structure differences. For example, far more single-family homes relative to multiples are built in the U.S. than in Canada. We think we have commuting problems, but Americans are more used to spending time in their cars to reach their stand-alone abodes in the “burbs”.

There are also affordability factors that vary between nations. U.S. homeowners are allowed to deduct mortgage interest payments from their income when they pay taxes. We should be so lucky.

And how do earnings compare? Moving to the global scene, maybe the citizens of one country aren’t so badly off if the exorbitant prices they pay for housing are matched by sky-high incomes.

I searched the web for some international house price comparisons. The Economist magazine calculates an index that shows the change over time in a lengthy list of countries.

According to this measure, Canada’s increase over the last several years has considerably outpaced most other nations.

But this doesn’t take into account the fact Canada was one of the nations least affected by the recession. Also, in a couple of years subsequent to the downturn, our economy grew faster than many others, especially those in debt-ravaged Europe.

Perhaps the best way to make cost-of-housing comparisons between countries is to consider the price-to-income relationship in each domestic market. The easiest-to-understand data source I’ve found appears at www.numbeo.com on the Internet.

Numbeo calculates a home-price-to-average-income ratio in which the numerator is comprised of a typical apartment/condo unit of approximately 90 square metres (approximately 1,000 square feet) and the denominator is net disposable family income.

According to this yardstick, Canada’s ratio is 5.08, which is more than double the U.S. figure of 2.16, indicating home prices are considerably more expensive north of the border than to the south. But keep in mind that U.S. prices are down about 30% versus where they were before the recession.

Canada’s ratio is not that out of line when compared with many countries other than the U.S.

In the industrialized world, other key ratios are as follows: Italy, 12.59; Spain, 9.45; Sweden, 8.44; France, 8.38; Australia, 8.12; Japan, 6.99; the United Kingdom, 6.73; Switzerland, 6.20; and Germany, 4.78.

Note that in the above paragraph only Germany has a figure lower than Canada’s.

In the BRIC nations, Brazil is sitting at 13.33; Russia, 12.00; India, 9.96; and China, 25.00.

Elsewhere in the emerging world, where average incomes are climbing, but are still well below what are prevalent in “rich” nations, one sees high ratios again: Hong Kong, 23.65; Taiwan, 15.51; Vietnam, 13.77; and South Korea, 11.52.

Mexico, by the way, is a relatively reasonable 5.65.

There are two ways to change the ratio — lower the price or raise the income level.

In Canada, new and existing home prices may be on the cusp of a decline. That’s addressing the number above the line (i.e., the numerator) in the calculation.

What’s happening with the figure below the line, the divisor?

According to the latest Payroll, Employment, Earnings and Hours report from Statistics Canada, workers are beginning to realize material benefits from an economy that is moving forward — perhaps not as quickly as we’d like, but with significant momentum nonetheless.

In March of this year, the total average weekly take-home pay of Canadian wage earners in “current” (i.e., not adjusted for inflation) dollars was 3.1% higher than in the same month last year.

A 3.1% gain in incomes is quite strong, considering that the latest all-items Consumer Price Index (CPI) recorded an increase of only +0.4% year-over-year. (The “core” inflation rate, which omits eight mainly food and energy sub-components, was livelier at +1.1%.)

Climbing wages suggest inflation may soon be prodded higher again, explaining why the Bank of Canada is holding to its “party” line that the next change in interest rate will more likely be up than down.

The list of industries with the fastest year-over-year increases in average weekly earnings, including overtime, is headed by forestry, logging and support services, +11.3%.

That figure elicits little surprise — except perhaps that it’s in double-digits — given the way the industry, through export sales, has been revitalized by the improvement in U.S. new home starts.

Also in the private sector, workers in finance and insurance (+5.8%) are doing better than the national average, as are employees in professional, scientific and technical services (+4.0%), manufacturing (+3.6%) and accommodation and food services (+3.5%)

Government workers are also doing okay, as evidenced by the percentage changes in education services (+4.3%), health care and social assistance (+3.9%) and public administration (+3.7%).

Those making a living in construction (+0.6%) are now lagging behind, but at least earnings have been rising somewhat. Staff-members in retail trade (-0.3%) and arts, entertainment and recreation (-0.4%) have been stuck with no change year-over-year, while those in utilities (-2.1%) and real estate (-2.7%) are being forced to live on less.

Regionally, the work forces in Saskatchewan (+5.5%) and Alberta (+4.6%) are reaping the benefits of their export-oriented strong resource sectors.

Workers in Ontario (+3.1%) and Newfoundland and Labrador (+3.0%) are making income gains at the same rate as the national average.

Employees in Manitoba (+1.8%), B.C. (also +1.8%) and Nova Scotia (+1.7%) are seeing modest gains, but those in Quebec (+0.1%), P.E.I (+0.5%) and N.B. (-0.2%) are struggling to hold on.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

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