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Canada's housing bubble is a cautionary tale for the US real-estate market

Aerial view of rows of suburban tract houses over Centerville, Maryland.
Edwin Remsberg/Getty Images
  • Canada's housing market is in overdrive as prices soar to record highs.

  • That's because, like in the US, there aren't enough homes for sale to meet demand.

  • The US housing market is starting to resemble Canada's — that should be a cautionary tale for all.

Canada's housing market is in overdrive as housing affordability sinks — it sounds too familiar to Americans.

The national average home price in Canada climbed to 816,720 Canadian dollars in February, hitting a record high, according to the Canadian Real Estate Association, and a cost 50% higher than that of the median US home price when converted to US dollars. The 20.6% year-over-year growth is attributed to a homebuying frenzylike that in the US — which was spurred on by record-low mortgage rates in 2020.

In both the US and Canada, the problems in the housing market boil down to the simple fact that there just aren't enough homes to house everyone who wants to buy after years of underbuilding and investors entering the market to make a profit.

"Ultimately, to tame housing-affordability challenges, more homes and apartments must be built," Robert Dietz, the chief economists of the National Association of Home Builders, told Insider.

While home prices showed signs of cooling in March, Canada's tremendous lack of available housing remains a hurdle stabilizing the market. To aid the recovery, Prime Minister Justin Trudeau's government last week announced a two-year ban on home purchases by foreign investors, among other measures, in hopes of cooling demand in the oversaturated housing market.

Housing experts say the move is not enough.

"I don't think prices are going to fall as a result, though I do think it takes away at least some of the competition in what is the most competitive market in Canadian housing history," Simeon Papailias, the founder of the real-estate investment firm REC Canada, told Bloomberg, adding that it's unlikely that a "two-year Band-Aid" would have an effect on a fundamental lack of homes.

As housing affordability plummets in Canada, it's hard to ignore the similarities to the US real-estate market. Whatever side of the border you're on, one thing is clear — housing availability is shockingly low in Canada and the US. If more homes aren't built to meet housing demand, the US may follow in Canada's footsteps.

Canada's housing bubble could be the future for the US real-estate market

Canada may have the lowest average number of homes available per capita, but the US isn't doing too hot, either.

According to the Department of Housing and Urban Development and the US Census Bureau, housing starts — the number of privately owned new houses on which construction has been started in the US — increased 6.8% in February. The NAHB estimated there were still 152,000 single-family units that had yet to begin construction. This is up 24.6% from a year ago and marks a four-month high of delayed starts.

Dietz said that's helping. "However, the availability of materials, lumber, labor, and lots remain key headwinds, with access to labor, in particular, likely to become more challenging in 2022," he said.

Employment has also been a huge challenge for the US homebuilding sector, which has experienced some of the worst job losses of the pandemic. Between December 2019 and December 2020, the field lost nearly 441,000 jobs. While the construction employment rate is up 5.15% since February 2020, job losses have been damning.

According to the Home Builders Institute, 2.2 million new workers are needed within the next three years to meet housing demand. Until employment improves, the NAHB estimates the US real-estate market lacks at least 1 million single-family homes.

While there are notable differences between the US and Canadian real-estate markets, the lack of available homes for sale has prompted experts to discuss a bubble in the US market. As affordability plunges in Canada, it stands as a reminder of how inventory can offset a real-estate market. With US housing supply remaining near four-decade lows and the median home price surging to $405,000 in March, the US may not be too far behind its northern neighbor.

The solution for both countries, Dietz said, is simple in theory but difficult in practice: "The key to improving housing affordability is increasing inventory."

Read the original article on Business Insider