The standard home in Canada now costs twice as much as in the U.S. A plan to rein in the ‘stunning’ boom is a test for both housing markets

Frustrated house hunters are waiting to see if a new campaign in Canada provides any relief.

Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.

Johnny Chen, 33, received a promotion and sizable salary bump in March, but it hasn’t helped his six-month search for a single-family home in Vancouver, Canada. Chen, a director of equity sales and trading at an investment bank who falls into Canada’s top income bracket, scrolls through online home listings every day. But the city’s low volume of homes for sale means there’s not much to see. A half-year into his hunt, he’s yet to make an offer on a place. “I’m a bit trigger shy… it’s hard to wrap my head around prices right now. Vancouver’s real estate market is a bit crazy,” Chen says.

Chen has hit open house after open house, but “there’s just so much competition,” particularly in his ideal price range of $2 million Canadian dollars or $1.6 million USD, Chen says. Even single-family houses on the market for $3 million CAD ($2.4 million) need “substantial renovation work,” he says. “It’s hard to know how much the home will actually cost with inflation in labor and building materials, plus slow turnaround times for building permits,” he says. So for now, he lives in a townhome outside of the city center that he purchased pre-sale in 2017.

Subscribe to unlock this article and get full access to Fortune.com

Johnny Chen, 33, received a promotion and sizable salary bump in March, but it hasn’t helped his six-month search for a single-family home in Vancouver, Canada. Chen, a director of equity sales and trading at an investment bank who falls into Canada’s top income bracket, scrolls through online home listings every day. But the city’s low volume of homes for sale means there’s not much to see. A half-year into his hunt, he’s yet to make an offer on a place. “I’m a bit trigger shy… it’s hard to wrap my head around prices right now. Vancouver’s real estate market is a bit crazy,” Chen says.

Chen has hit open house after open house, but “there’s just so much competition,” particularly in his ideal price range of $2 million Canadian dollars or $1.6 million USD, Chen says. Even single-family houses on the market for $3 million CAD ($2.4 million) need “substantial renovation work,” he says. “It’s hard to know how much the home will actually cost with inflation in labor and building materials, plus slow turnaround times for building permits,” he says. So for now, he lives in a townhome outside of the city center that he purchased pre-sale in 2017.

Vancouver’s housing market is an extreme—it’s Canada’s least affordable city—but Chen’s plight is commonplace across the country. Owning a home in Canada has become less attainable in recent months. Canada’s home prices have increased 30% since early 2020, a boom that’s “nothing short of stunning,” economist Robert Hogue wrote in a recent Royal Bank of Canada (RBC) report. Canada’s cost of homeownership compared to median income levels hit its highest level in 31 years in March. Canada’s housing market frenzy since the spring of 2020 has largely mirrored that of the United States—where median home prices surged 27% during the same time. Now the Canadian government is introducing a flurry of new legislation to address the country’s housing crunch that may provide lessons for its southern neighbor.

Canadian finance professional Johnny Chen in his office in downtown Vancouver, Canada. A half-year into his hunt for a single-family home, he’s yet to make an offer on a place.
Photo courtesy of Johnny Chen

Great White North housing boom

In Canada—as in the U.S.—the housing market slumped in early 2020 as the pandemic bred uncertainty and consumers cut back on spending.

Then COVID relief policies and a shift in housing needs kicked in. Canada’s central bank lowered interest rates from 1.25% in March 2020 to 0.5% by March 2022, and the government bolstered financial support for households, including handing out cash. Those policy changes made buying a home cheaper and easier.

The pandemic boosted demand for larger living spaces, with the home becoming “people’s workplace, children’s schools, and [the center of] entertainment,” says Phil Soper, president and CEO of Canadian real estate brokerage Royal LePage. At the same time, Canadian millennials entered their “prime property trading years”—buying their first homes or upgrading starter homes—while many baby boomers became empty nesters and searched for new properties to suit the next stage of their lives, Soper says.

The surge in demand collided with a long-standing problem in Canada: too few houses. Out of the Group of Seven (G7) nations—the world’s advanced economies—Canada has the lowest number of housing units per 1,000 residents. By early 2022, Canada’s home prices and unaffordability had hit unprecedented levels.

This February, Canada’s average home price reached a record $816,720 CAD ($646,809), 50% above pre-pandemic levels and up 20% from one year prior—and more than nine times the average household income, according to the Canadian Real Estate Association. Over the past year, the percentage of monthly income that households were spending on mortgages rose at the fastest clip in 26 years to now hover at nearly 50%, according to the National Bank of Canada (NBC). In Vancouver and Toronto, Canada’s main business hubs, the typical household needs to save 10% of income for 431 months and 340 months, respectively, to make a down payment on a non-condo home, according to NBC calculations.

The U.S. housing market has followed a similar trajectory in the last two years. “Many of the same factors [were] at play, including [millennials’] household formation and the shift toward more space,” says Robert Kavcic, director and senior economist at the Bank of Montreal (BMO).

In March 2020, the U.S. Federal Reserve dropped interest rates to nearly 0% to support the economy at the start of the pandemic. Rock-bottom interest rates and heightened demand due to the pandemic and demographic shifts fueled a surge in U.S. median home prices, which have grown 27% since spring 2020. The U.S.’s median home price—the midpoint sale price of all homes sold—last month reached an all-time high of $375,300, a 15% jump from one year earlier, according to the National Association of Realtors (NAR). Canada’s real estate trade body tracks home prices by calculating the average cost—which tabulates all home sale prices and divides them by the number sold—rather than median prices, which means that the average can be skewed by houses sold in expensive markets. But even when removing Canada’s most expensive cities, Vancouver and Toronto, from the equation, Canada’s average home price grew 21% over the last year.

In the U.S., too, housing affordability has declined sharply, dropping to 14-year lows this year. Mortgage data provider Black Knight told Fortune that American households now need to spend 31% of their monthly income to service mortgage payments on the average U.S. home—the highest figure since 2007 and a 7% jump from last December alone. In the 2010s, U.S. households spent on average 20% of their monthly income on mortgage payments.

And the same key culprit—a severe housing shortage—is making the U.S. housing crunch worse. U.S. homebuilding has slowed since the 2008 recession, says David Dworkin, CEO of the National Housing Conference (NHC), a nonprofit organization focusing on affordable housing research and advocacy. Now the country needs to build around 5 million homes to keep up with soaring demand, according to research from Realtor.com. American homebuilders are building more housing units than they have in the past 16 years, even as they struggle with rising costs and supply-chain snarls, but U.S. housing inventory remains well below pre-pandemic levels and will likely stay that way for some time, experts say.

Northern remedies

Earlier this year, the government of Prime Minister Justin Trudeau seemed to realize that Canada’s housing crunch—paired with an inflation rate now at a three-decade high—was snowballing into a political crisis. Nearly 60% of Canadian mortgage holders say that their mortgage payments are squeezing their budgets, while 53% of citizens say that they can’t keep up with the cost of living, according to recent surveys from nonprofit polling and research firm Angus Reid Institute.

Earlier this month, the Canadian government took action, releasing a 2022 annual budget that contained 29 housing-related measures—at a cost of $10 billion over five years—to help boost housing supply, combat speculative buying, and provide greater support for first-time homebuyers.

Certain policies included in the budget—such as the two-year ban on foreign home buyers—are political plays, Soper argues. The moratorium will exacerbate fears that foreigners are buying up Canadian homes and driving up prices, while doing little to cool the hot market, Soper says. Data on nonresident homeownership in Canada is scarce, but one estimate from real estate advisory Bullpenn Research & Consulting found that foreigners made up 1% of home purchases in 2020. A 2019 study by Statistics Canada showed that non-Canadians owned 2.6% of homes in Toronto and 4.3% in Vancouver (and the majority of those were condo purchases, rather than the in-demand single-family homes). The pandemic largely barred non-Canadians from entering the country and buying property, yet Canada’s home prices still reached record levels, proving that foreign buyers are not the ones driving demand, Soper says.

A restriction on foreign homebuying in the U.S. wouldn’t make sense for the same reasons. Nonresident homebuyers make up 2% of the market. The U.S. housing frenzy is driven by domestic demand and a chronic shortage of supply, says Gay Cororaton, director of housing and commercial research for the NAR.

Soper is encouraged by the Canadian government’s efforts to increase home supply, such as its plans to launch a $4 billion fund to build 100,000 housing units within three years. That goal is part of a larger effort to double the rate of new home construction over the next decade.

But stoking the rate of homebuilding won’t ease the housing crisis overnight. Canada is already building homes at a pace not seen since the mid-1970s. Over 320,000 units are currently under construction, while housing starts hit 246,243 units in March. Canada’s construction industry is confronting a labor shortage; it will need 300,000 more construction workers in the next decade to meet its homebuilding goals. The scarcity of workers and higher cost of labor and materials could mean the prices for homes being built now jump even higher, says Kavcic.

Still, the Canadian government’s new policies—especially its long-term investments in housing—provide a firm timeline and steady source of funds that will give builders and developers the confidence to break ground on more houses, Dworkin says. “Knowing what the pipeline is up ahead makes a big difference in planning for development,” he says.

In addressing its housing crisis, Canada has an advantage over the U.S. in that its provincial and federal leaders agree that the government must intervene to address runaway prices, Soper says.

By comparison, U.S. efforts to ease the housing crunch have stalled amid political gridlock. U.S. President Joe Biden’s Build Back Better legislation would have built or improved 1 million affordable homes, but the bill died in Congress after not garnering enough support from Biden’s own Democratic Party.

Canada’s central bank and the U.S. Federal Reserve have hiked interest rates recently, helping cool home sales and prices slightly. In Canada, home sales and new listings fell 5.4% in March, while 30-year mortgage rates in the U.S. have already risen sharply. These actions will “temper demand and get the housing market back into balance,” Kavcic says, but they don’t address the nagging housing shortage in both countries. “If we’re not building enough housing, what we’re going to end up with is less affordable housing—and still not enough of it,” Dworkin says.

Chen hasn’t given up on his dream for a single-family home, though he feels like the search is never-ending. “You’re looking for a bargain, which never seems to materialize in Vancouver. But I ultimately need more space to eventually have a family and for my parents and friends to visit,” he says.

He expects Canada’s recently announced policies and rising interest rates to ease home prices slightly. If prices don’t fall as much as he needs, then “I’ll simply keep working to save up more money to grow my down payment,” he says. “My battle plan for now is simple.”