The Depressing State of Finance & Economics (And How Canada Makes it Worse)#

Covering business finance and economics every week can honestly be a bit depressing. Just in the last 2 years, we’ve seen personal savings evaporate, Consumer Debt hit record highs, and the job market defined by trends like ghost jobs, broad sector layoffs, and Giga (assuming that means gig work, keeping it simple). All this while asset prices have ballooned far faster than household incomes or even their true underlying value.

The results are pretty straightforward: it’s getting much harder for people who work for a living to keep up with those who already own assets. Even the most focused and hardworking folks are finding it tough just to make ends meet, let alone save up to eventually achieve financial security themselves.

But hey, even if you’re feeling like it’s all a bit hopeless, just remember: it could be worse. You could be from Canada.

How on earth is anyone even managing to exist in Canada right now? It feels like being trapped. We hear things like “house prices in Vancouver are expected to rise and get back to the peak where they were at two years ago.” There are stories like a landlord paying for someone to live in a motel for a short time, but when that ends, their only choice is to move into their shed because there’s “no place else you can afford to live.”

As Canadian students get ready for school, a growing number are still trying to find work. The latest US Census Data shows that in 2022, More Than 126,000 People moved from Canada to the United States.

The Big Picture Problem: Good Numbers, Bad Reality#

Okay, so a big problem across the world right now is that figures like GDP, stock market prices, and unemployment numbers can look really, really good on paper. But they don’t actually help out the people whose incomes haven’t kept up with productivity, who don’t own stocks, and who are working one of the new jobs created but are still struggling to pay the bills.

But in Canada, things are tougher because even the big picture numbers don’t look good anymore.

• GDP growth has been sluggish.
• Because of population growth driven by high levels of immigration, GDP per capita hasn’t really improved at all over the last 10 years.
• Unemployment is also higher than in America.
• Average annual wages are far lower.

However, there is one area where Canada has a commanding lead over the USA: average home prices.

So, the average Canadian earns less but has to pay much more for a place to live. This makes one of the biggest problems globally – housing affordability – much, much worse for our neighbors to the north.

Canada’s Unique Housing Crisis: More Than Just High Prices#

Canada’s biggest exports have always been natural resources, manufactured goods, and YouTube videos about how crazy their housing market is. So maybe this point doesn’t need repeating. But a lot of that talk misses something important: America has an unaffordable housing problem too, and so does most of the developed world.

But Canada is still a little different.

Comparing real estate prices worldwide is incredibly difficult. A city like Tokyo is certainly more expensive per square foot than San Francisco. But Tokyo also has a lot more small, relatively budget-friendly apartments for regular people. That’s why, even though it looks almost twice as expensive on paper, Tokyo has been praised for its housing affordability.

Here in the United States, the land of urban sprawl, our average house might cost more overall, but it’s also a lot larger. So, if you can afford a home here, it’s probably going to be more comfortable than a similarly priced place in a more compact city.

Let’s compare two specific cities: Vancouver and Seattle. They’re roughly similar – similar population, similar preference for freestanding homes spread out, and they’re even relatively close to one another.

• The price of the average home in the Vancouver metropolitan area is slightly more expensive than the average in Seattle.
• But here’s the kicker: Seattle has a median household income more than twice as high as Vancouver’s.

Why the huge income difference in Seattle? Largely thanks to Big Tech companies like Microsoft and Amazon, which have their global headquarters there, plus dozens of other major tech firms with big offices employing lots of people in very well-paid roles. These companies have certainly pushed up real estate prices in places like San Francisco, New York, and Seattle. As someone who’s moved to one of these cities for one of these jobs, I know firsthand the problems this causes for locals who can’t afford their own homes anymore.

But at least it makes some sort of sense: people with good jobs can afford to pay higher rents. And since those high-paying jobs are mostly in just a few cities, those cities become very expensive.

In the States, real estate prices have been driven up by a few concentrated industries (like tech). But in Canada, real estate is the industry.

According to a report by the OECD:

• Real estate in Canada contributed to 40% of its capital investment.
• The USA, by comparison, was only 20%.

Hilariously, this statistic was proudly reported on by Canada’s largest real estate agency in a post they made about a year ago. You might think, “Why are they confessing this?” They’re not confessing, they’re bragging.

Vancouver doesn’t have the same number of jobs where young professionals can make life-changing amounts of money before they turn 30 and move away. It’s largely a regular city for regular people with opportunities that aren’t particularly remarkable. Put another way, nobody is moving to Vancouver specifically to get ahead financially the way they might move to Seattle.

The data backs this up: According to recent census data from both cities, the average age of someone living in Vancouver was 4 years older than someone living in Seattle. This suggests younger, mobile professionals are choosing Seattle for opportunity.

The Real Consequences: Owning vs. Renting#

This situation makes all the problems people are facing much worse. If you live in cities like these (especially in Canada), your financial situation isn’t really defined by your income or even how responsible you are with money. It depends almost entirely on whether you own a home or not.

A renter who is a highly skilled professional with diligent saving and an investment plan can be financially crushed by someone with just an average income and no financial discipline, simply because rent is so high and because houses make more money than the people living in them.

Now, again, the Canadian real estate market is hot. You didn’t need me to tell you that. But a lot of people stop there. Hot take alert: expensive real estate isn’t necessarily a problem if incomes keep up with prices. Homes in West Virginia might seem cheap to Californians, but they would be very expensive to someone living in Bangladesh, simply because of the income differences between those areas.

So, while it’s not as fun as opening up Zillow north of the border and making a shocked face at a derelict home that costs more than you’ll ever make, we really need to dig a little deeper. What’s actually important in Canada is understanding how it got this bad without the household incomes to support it, and what the real long-term consequences are of this mess, even for the homeowners. It’s not a great situation for anyone.

So, it’s time to learn how money works to find out what they’re doing in America’s Hat.

Why Canada’s Housing Got This Bad (Without the Income)#

If it wasn’t booming economic opportunity driving up real estate prices in Canada, what was it? Well, there are actually three main factors at play here. My friend Richard from The Plain Bagel did a great deep dive on this last year, and as a Canadian Financial professional, his insights are definitely worth checking out if you want even more detail.

Here are the three reasons:

1. Concentration and Zoning: Canada is the second biggest country in the world, but most of its people live very close to the southern border in just a small handful of cities. These cities are often surrounded by protected natural areas, which are lovely, but combined with very tight zoning regulations, there just isn’t much space to build new houses. Plus, our Canadian brothers and sisters seem even more resistant to building medium-density housing (like duplexes or townhouses) than we are in the US.

2. Avoiding the 2008 Crash: Canada never really experienced the same housing shock that hit the US in 2008. Their financial sector was a bit less wild than ours, and they got a lot of help from exporting resources to China. While American real estate went through a massive reset and many people lost everything, making investors wary, Canadian property prices barely dropped. Any small losses were made back within just a few months. This meant their homes stayed relatively expensive, and investors weren’t scared away from going all-in on real estate like they were in America.

3. Immigration & Investment: Canada welcomes about 1/8 as many immigrants as the USA every year. But the USA has eight times the population and many more cities to spread people out. Even some pro-immigration experts admit that the US is having problems handling the influx; in Canada, it’s a much bigger strain on housing supply in those few concentrated cities.

   Also, the type of immigration is a little different. A higher share of new arrivals are relatively wealthy people coming through skilled worker or student visa programs. For some of these people, job opportunities in Canada are secondary to the country’s political stability, safe environment, and strong property rights.

   A home in Canada is seen as a very safe way to park money in a country that, while having its own issues, is relatively safe compared to some places where people worry the government could just seize their wealth. This has led to a strategy called land banking, where someone (often using a family member with a student visa) buys a property purely to hold it as a safe store of value. To be fair, the Canadian government knows about this and has put in new taxes on vacant homes, but people have found clever ways around it, so it’s still a popular strategy.

   For others, it’s simply easier to get a skilled worker visa in Canada than in the US. So, even if Canadian jobs pay less than American ones, they pay a lot better than similar work in developing countries.

   Immigration has been used to help support Canada’s aging population and fill skilled job gaps that existing Canadians aren’t paid enough to do. But investors also see it as proof that buying real estate is always a safe bet because the government needs to keep bringing people in to keep the economy working.

Real Estate Dominance & Other Problems#

This is still only half the problem, but it affects the other half. Canadians love investing in housing. It’s been so profitable that they haven’t been as excited about investing in much else. And when they do invest in actual businesses that generate cash flow, US-based companies have often been more attractive than their own homegrown businesses.

Think about this: the entire combined value of the biggest listed companies in Canada is less than Apple, Microsoft, or Nvidia individually.

This is why Canadian companies often can’t pay as well as the big American ones. And this also means a lot of talent leaves Canada to get better-paying jobs in the States. If you had to choose between living in Toronto, where the average house costs four times as much as the average in Houston, and making more money down in Texas… which would you pick? I’m actually asking! If you’re Canadian, leave a comment below, let’s take a little poll.

Either way, hundreds of thousands of mostly young Canadians are making that move every year, making the country even more dependent on immigration just to avoid collapse.

Even ignoring attracting financing, starting a business is harder in Canada. There are generally fewer business-friendly regulations, a smaller domestic market, less available talent (because they leave), and yes, even commercial real estate is expensive too.

Canada is a clear example that a real estate problem can easily become an everything problem, and it’s tough to realize how bad it is until it’s too late.

The Pain Today: Mortgages and Debt#

Trying to gently fix this “house of cards” without causing a crisis with record levels of household debt is potentially going to take decades. People are already struggling because almost all mortgages in Canada have adjustable rates. This means as interest rates went up to fight inflation, the rates people pay on their mortgages also went up a lot, even if they took out the mortgage when rates were low. Some mortgage payments have doubled or tripled in the last 4 years, making it hard for many families to afford anything else besides keeping the roof over their heads.

So yeah, thinking about Canada might make you feel a bit better about where you are, but don’t get too smug just yet. Here in America, we’re not too far behind, and our lending standards aren’t as strict as Canada’s.

Canada is trying to keep their housing market afloat with a “fire hose” of immigration. We in the US are doing it with things like 1% down payment mortgages and huge corporate real estate investments. Our average incomes might be higher, but that average is pulled up by a small number of extremely high earners in those specific, concentrated industries that turned places like Seattle and San Francisco into what they are today: unaffordable, gentrified hellscapes. The lowest income levels in Canada for the people most hurt by unaffordable housing are actually higher than in the US, assuming they can find a job in the first place.

Feeling Down? Could Be Worse!#

If you’re Canadian and watching these videos has got you feeling a bit depressed, just remember: it could be worse. You could be Australia. Make sure to subscribe if you want to see us cover that situation!

If you want a more complete picture of why you can’t afford a home, I’ve put together a one-hour collection of all these problems across basically every housing market around the world. It’s on a new channel I made that brings together topics like this and turns them into longer videos without ad breaks. Might be a nicer way to watch some older videos for some of you.

So, make sure to like and subscribe to keep on learning how money works!

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