balance than the same payment covered as recently as the year 2000, when five-year mortgages were 8 percent. Not only that, but the total interest paid over the life of a twenty-five-year mortgage at today’s rates would be half the amount paid on an 8-percent mortgage despite the mortgage amount being 72.5 percent larger. If you think mortgage payments are scary now, ask someone who owned a home in the early 1980s how crazy mortgage payments were when interest rates were massively higher, reaching over 20 percent.
If you assume Canadians are buying houses based on how much monthly payment they can afford, the decline in interest rates could account for 72.5-percent higher house prices since 2000, compared to the actual ~200-percent increase in the average Canadian house price since then.
This is a point that is often used to argue for a pending Canadian housing crash. The worry is that if interest rates were to rise back up to an 8-percent five-year mortgage, house prices would have to decline to offset the increase that lower interest rates helped move higher, to maintain roughly similar mortgage payments, which in theory could result in a 42-percent decline in average house prices.
It seems pretty far-fetched for interest rates to rise to 8 percent in the near future, but you never know. Nevertheless, interest rates don’t need to go to 8 percent to hurt demand for home ownership.
As house prices have continued to rise, it’s not surprising that ownership rates have been rising. The positive impacts of a rising ownership rate and falling interest rates on house prices are pretty self-explanatory. It’s a positive feedback loop, with rising prices encouraging more people to “invest” in home ownership, resulting in more demand, which ultimately supports higher prices.
It’s also pretty easy to understand that if ownership rates were to stop rising or begin to fall, and if interest rates were to stop falling and even rise, house prices might start to fall.
What might be less easy to see is the unique physical structure of Canada’s housing markets and how that affects house prices. When it comes to the structure of Canada’s population, I find our country to be fascinating. I spend a good chunk of my time studying real estate markets, in Canada and around the world, looking at where population is concentrated, how cities are set up, and how those factors influence property prices. When I travel to other parts of the world to talk to real estate investors about Canadian real estate, one of my favourite things to do is tell investors who don’t know a lot about Canada how incredibly concentrated our population is. The responses can be priceless.
I’ve found that people who have never been here or don’t know much about the country usually do know three things. The first is that Canada is the second-largest country in the world by area. The second is that our population of 36 million people is pretty small.
With more than 9 million square kilometres of land, that works out to about 3.4 people per square kilometre. About 167 Canadian football fields fit into a square kilometre (CFL fields are 43-percent larger than NFL fields — just saying), which means Canadians have about forty-nine football fields of space each. That’s a lot of space for each of us to run around in.
Canada’s population starts to look very, very small when you compare it to the United States, which has a population of 332 million people. The United States is slightly smaller than Canada by area and has more than nine times as many people, leaving about thirty-five people per square kilometre. That’s less than five Canadian football fields for each American. Not cramped, but we still have ten times as much space each as of our friends south of the border.
Source: OECD Regions at a Glance.
But even the United States is pretty spread out when compared to other countries. India, at almost 1.3 billion people, has about thirty-five times the population of Canada and a land area of about one-third the size of Canada, with almost 390 people per square kilometre. That’s less than a half a football field each. With 160 million people, Bangladesh is tops among large countries, with almost seven people per football field.
It’s easy to see why outsiders looking in at Canada might think it’s a vast, barren land, one that is barely populated. Maybe they think all Canadians live solitary lives in cabins deep in the woods, rarely running into each other. After all, each of us has almost fifty football fields of space, while the average Bangladeshi shares a single field with six friends.
Which brings us to the third thing most people know about Canada: It gets cold. For a good chunk of the year. In fact, in winter Canada is one of the coldest places in the world — almost as cold as Russia, and not much warmer than Antarctica
Why does this matter? For all of Canada’s massive expanses of land, Canadians are living virtually on top of each other.
Canadians are overwhelmingly concentrated in just a few cities across the country.
Canadians are overwhelmingly concentrated in just a few cities across the country, with more than 80 percent of Canadians living within 160 kilometres of the U.S. border. Any further north, and it starts to get very cold.
All joking aside, the population centres are also concentrated along the border because a large portion of the border runs along the St. Lawrence River and the Great Lakes, which are important shipping and trade routes and were even more important over 100 years ago when Canada’s largest cities were beginning to establish themselves as major population centres. Even today, the vast majority of Canada’s trade is with the United States, providing economic incentive for population centres to be close to the border.
Overall, some 55 percent of Canadians live in the ten largest cities in Canada. That’s twice the share of Americans in the U.S.’s largest cities.
| Census Metropolitan Area | Population | % of Population |
| Toronto | 6,129,934 | 17% |
| Montreal | 4,060,692 | 11% |
| Vancouver | 2,504,340 | 7% |
| Calgary | 1,439,756 | 4% |
| Edmonton | 1,363,277 | 4% |
| Ottawa | 1,332,001 | 4% |
| Quebec | 806,359 | 2% |
| Winnipeg | 793,428 | 2% |
| Hamilton | 771,703 | 2% |
| Kitchener-Cambridge-Waterloo | 511,319 | 1% |
| Top 10 CMAs | 19,712,809 | 55% |
| Canada | 35,985,751 | 100% |
Source: Statistics Canada, 2015.
| Metropolitan Statistical Area | Population | % of Population |
| New York | 20,182,305 | 6% |
| Los Angeles | 13,340,068 | 4% |
| Chicago | 9,551,031 | 3% |
| Dallas | 7,102,796 | 2% |
| Houston | 6,656,947 | 2% |
| Washington, D.C. | 6,097,684 | 2% |
| Philadelphia | 6,069,875 | 2% |
| Miami | 6,012,331 | 2% |
| Atlanta | 5,710,795 | 2% |
| Boston | 4,774,321 | 1% |
| Top 10 CMAs | 85,498,153 | 27% |
| United States | 321,418,820 | 100% |
Source: U.S. Census Bureau, 2015.
The fact that so many of us live in just a handful of places means we generally live in big cities. Populations globally are increasingly moving into cities. So, while in theory we each have an enormous amount of space, when it comes to the housing market, Canadians choose to live big-city lives: Canada is a highly urban country.
Should we be surprised house prices in Canada are high when we all live in big cities? I don’t think so.
However, knowing some of the reasons Canadian house prices have risen doesn’t change the fact that housing here is expensive. So expensive that it’s gotten a lot of very smart people very concerned.
CHAPTER 6
What Really Drives Real Estate Prices —
The Golden Rule
If we’re going to be talking about the benefits of renting versus buying, we have to talk about why house prices rise