Golden Girl Finance | July 15, 2013 

The high cost of being Canadian

The True North may be strong but it isn’t exactly free. At least, not from a household finance perspective.

Last winter, a British economic research group concluded that the cost of living in the UK is 11% higher than the international average and 18% costlier than living in the United States.

No surprise there, right? We have all heard stories or had our own experiences of shockingly high prices for drinks or hotel rooms in London. If you’ve ever rented a car in the UK or Europe then you know our price of gas in North America, while crazy-making, is comparatively nothing to complain about. And we nearly all have a cousin or friend or friend-of-a-friend who lives in the UK and pays an exorbitant rent for a very small flat with only occasionally reliable hot water.

And that’s why we choose to live large and comfortably on the cheap here in Canada, right?

The loonie truth

Not so fast. Looking at the same OECD (Organisation for Economic Co-operation and Development) data that the British group analyzed, it becomes apparent that as costly as it is to live in Britain, Canada is still costlier. Whaa---at?

Yup. Good ol' Canada was revealed to have a cost of living 11% higher than Britain. Which means, living in our home and native land costs us a whopping 22% more than the international average. Now there’s a bit of a shocker, eh?

Real estate reality

A major contributor to Canada’s high cost of living comes down to how much we pay for our housing. Turns out that not only is Canadian real estate overvalued, but it is the third most overvalued real estate market in the world. Wu-hoo, bronze medal!

The OECD studied real estate prices, rents and household incomes in 34 developed countries. They compared the price of an average home to what it could be rented for, and the price of an average home compared to the average salary. The OECD calculated that based on home prices to income, Canada’s real estate prices are overvalued by 30%. Compared to rents, real estate prices in Canada are overvalued by 60%.

So this means that Canadians are paying, on average, 30%-60% more than we should be for our homes based on our incomes and what we would pay in rent for the same homes. Only Belgium and Norway were deemed to have more expensive real estate than Canada.

In case you feel like shopping elsewhere - real estate markets that are currently undervalued include Japan, Germany, South Korea, Ireland and Portugal.

Finally, just to add insult to injury, BMO Nesbitt Burns recently conducted a study of the housing market in Canada and the US. This research revealed that average home prices in Canada are a “towering” 62% higher than real estate in the US. Yikes!

What goes up?

So by now you must be thinking, if real estate in Canada is so overvalued, it must be poised for a drop. What goes up must come down, right? Good questions, smart cookie. While there have been small pockets of price drops over the past year, generally Canadian home prices are continuing to rise – even faster than incomes and faster than rents.

According to the OECD, this could be a problem if and when interest rates rise or income growth slows – in which case, a lot of people would suddenly not be able to afford the homes they are financing now and fewer people would start shopping for a new home. As a result, a more widespread housing price correction would likely ensue.

Oh, behave!

Fortunately, Canadians are not only a polite lot, we are an obedient lot. Over the past year, the government of Canada has gently applied the brakes to the housing market, by tightening mortgage rules and making it tougher for Canadians to qualify for homes that are too highly-priced for their income and debt levels.

Speaking of debt levels, Canadians have also been working on reducing credit card and personal debt, thanks to numerous nagging reminders from our financial leadership. The less debt we hold in general, the more easily we can apply our income to our housing costs, overvalued as they may be.

Get what you pay for

Despite the relatively high cost of living here, would you seriously consider living anywhere else? There is a reason why Tom Hanks, Mark Wahlberg, Goldie Hawn and Kurt Russell, Steven Spielberg, Catherine Zeta Jones and Michael Douglas all own property here. After all, we’ve got the nicest lakes, the most beautiful mountains, and coasts on not one but two (okay, three!) spectacular oceans. Come to think of it, there is a lot of space in between those oceans…uninhabited real estate space. Hmmm…pack your bags and circle the wagons, honey, we’re moving north!