James Macek: Renting vs Buying

The traditional Canadian dream of climbing the property ladder is slipping away from a generation of young buyers, as the gap between what it costs to buy a home and what it costs to rent one reaches historic proportions.

A comprehensive study co-authored by James Macek at the Alberta School of Business published in the Canadian Journal of Economics reveals that Canada’s housing affordability crisis is uniquely concentrated among home owners, not renters. Skyrocketing home prices have entirely outpaced household incomes over the last two decades, which means that the barrier to entry for first-time home buyers has evolved from a challenging hurdle into an insurmountable financial wall. Surprisingly, however, the cost of renting has stayed remarkably balanced with what Canadians earn.

The great divergence: prices vs. rents

Since 2000, real estate values across all Canadian markets — ranging from major metropolitan hubs to rural areas — have surged. However, the paper highlights an overlooked anomaly: national rent growth has closely tracked household income growth, rising at an average of 2.9 per cent annually over a 40-year period spanning 1981 to 2021. This is in contrast with the U.S., where rent growth has exceeded income growth since 2001.

This decoupling of home values from rents means that while lifetime renters’ housing costs have stayed relatively stable relative to their earnings, prospective buyers are entirely priced out. Between 2001 and 2021, nominal home prices in Canada nearly quadrupled, outstripping household income growth by upwards of 4.2 percentage points annually. This cumulative surge outpaced the U.S. by roughly 50 percentage points over the same period. The gap is being heavily fueled by a major population surge, with immigration adding nearly one new resident for every 100 Canadians every single year. To put that in perspective, it is a pace of growth roughly three times faster than that of the U.S., creating an intense scramble for a limited number of available properties. Furthermore, Canada's tax system supercharges the demand for ownership by excluding capital gains taxes on primary residences. At the same time, rigid credit constraints and policies like mortgage stress tests make it increasingly difficult for young families to afford mortgages, locking them out of equity accumulation.

"The rising affordability challenge in Canada is uniquely oriented toward the owner-occupied market segment," notes Macek. "This explosion in value growth has likely negatively impacted young households intending to become owners and strongly benefited incumbent homeowners, while leaving lifetime renters no worse off."

Reflecting on this trend, the researchers note that the growth of realized rent and income have been similar. The low rent growth is hard to reconcile with much faster growth in home prices because, as standard economic logic claims, home prices reflect the discounted sum of future rents that homes could earn on the rental market. Until recently, increases in price-to-rent ratios must have reflected both optimism about continued future home price growth and low borrowing costs.

Structural strains on the economy

The research expands beyond individual households to outline the broader macroeconomic risks facing Canada. Skyrocketing home values have increased the financial strain on typical Canadians. For every dollar of disposable income the average Canadian household brings home, they now owe more than $1.70 in debt — a massive leap from 1996, when earnings and debt were nearly equal. On a national scale, Canada’s total household debt is now larger than the value of the entire country's economic output for a year, creating a mountain of leverage exceeded globally by only Switzerland and Australia.

This high level of leverage carries immense risk. A sudden economic shock or a spike in unemployment could force households into mortgage arrears, triggering forced home sales that could cascade into broad financial instability. Additionally, the researchers warn that funneling significant financial resources into servicing mortgages and interest expenses actively starves more productive sectors of the economy, reducing long-term national productivity growth.

The solution: Densification and embracing long-term renting

To restore balance, the research indicates Canada must pivot away from single-family detached homes, which suffer from a highly inelastic supply in high-demand, land-scarce markets. Instead, the data shows that Canada’s large cities have mitigated even worse affordability declines by building high-density, multifamily structures. While U.S. construction rates dropped precipitously following the 2008 financial crisis, Canadian cities successfully transitioned their building stock, outstripping their U.S. counterparts in building multifamily housing. In many Canadian cities, multifamily housing built between 2001 and 2021 largely consisted of condominiums, which serve both the rental and owner markets. Even in rural regions and small metropolitan areas, multifamily buildings have recently grown to command 45 per cent and 65 per cent of all housing starts over this period, respectively.

However, Canada has increasingly relied on a fragile "secondary rental market". For decades, strict tenant protections and rent controls in major cities disincentivized institutional developers from building purpose-built rentals. Consequently, cities like Toronto and Vancouver came to rely on individual condo investors acting as secondary landlords. When interest rates rise, these individual investors face negative equity and are incentivized to sell, creating massive housing tenure instability for young tenants.

The authors argue that policy must focus on two structural fixes: smoothing the path for developers to build permanent, high-density housing, and actively fostering an environment where Canadians can comfortably remain long-term renters.

"With rents consistently lower than home prices, making it easier for households to exist as long-term renters is one path toward progress in the housing affordability challenge," says Macek.

Addressing the necessary policy shift, the researchers add that given constrained accessibility to most exurban regions of metropolitan areas, means finding ways to make it easier for developers to build and densify while providing the infrastructure needed to support such densification. Moreover, it means building housing suitable for both the owner-occupied and rental market segments.

Key takeaways

• Ownership vs. rental divide: Canada’s housing crisis is structurally an ownership problem. Since 2000, home prices have decoupled from incomes, while national rents have remained aligned with household earnings.
• First-time buyer deficit: Prospective and young homebuyers bear the brunt of the crisis due to steep down-payment barriers and credit constraints, while existing homeowners reap substantial capital gains.
• Macroeconomic debt risks: Fueled by high property costs, Canadian household debt sits at a dangerous 102 per cent of GDP, drawing resources away from productive long-term economic investments.
• The density advantage: Canada has successfully outpaced the U.S. in expanding multifamily housing. Spatially concentrated densification in urban centres has been the primary defense against worse nationwide affordability shocks.
• A new rental paradigm: Resolving the crisis requires treating long-term renting as a viable, secure alternative to ownership, alongside boosting purpose-built rental construction and reducing barriers for urban developers.

Read Macek’s full article in the Canadian Journal of Economics at DOI:10.1111/caje.70054

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