About 36% (14.8m) of Canada’s (41m) population lives in three metro areas (StatsCan data): Toronto, Vancouver and Montreal.

Unfortunately, these three cities have the dubious distinction of experiencing the most significant home price inflation in North America over the past two decades, far ahead of other major American cities (shown below, courtesy of Visual Capitalist), and multiples of household income growth over the same period.

(Click on image to enlarge)

Two months short of the 4th anniversary of the February 2022 real estate bubble peak in Canada, belief in mean reversion is spreading. Perennially bullish brokerages are now predicting home price declines will continue in some of the most overvalued areas. See, Royal LePage projects Toronto-area home prices will drop 4.5 per cent by end of 2026.

Builders and housing-related retailers are also warning along for the ride, see Home Depot Shares Fall as Retailer Gives Guarded Fiscal 2026 Forecast.

High shelter costs drain cash flow away from other spending, saving and investment. The higher the price of a home, the more buyers are likely to borrow to acquire it, and the longer the cash drain from other needs and goals.

The cost of borrowing is rarely mentioned in home-buying discussions beyond the monthly payment. But the cost of borrowing over 15-, 20-, 30-, and 50-year amortization periods increases home costs by 50, 75, 121, and 226%, respectively, depending on the term (the cost of borrowing $600k is shown in the table below, courtesy of DCP).

In other words, a $600k home loan ends up costing $926k over 15 years, $1.052m over 20 years, $1.329m over 30 years and $1.962m over 50 years. Principal paid, and borrowing costs are in addition to transaction costs, taxes, upkeep, and maintenance over the holding period.

On a full-cost accounting basis, home ownership often yields a flat or negative return. It is consumption spending, and inflated prices end up costing a fortune.

Affordable homes can be lovely to own, and if they are paid off and not continually refinanced, they can serve as a store of value. But they’re more of a land bank than an investment.

All of these factors should be considered when reviewing the efficacy and efficiency of financial planning and housing-related monetary and fiscal policies.

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