Some economists like Jeff Rubin believe that it was the price of oil that blew up the mortgage market in United States and caused the great recession. Whether you agree or disagree with him, Rubin is at least right about one thing - the fact that the rising price of oil has made the Canadian dollar a petrocurrency as Alberta's oil sends became increasingly profitable. That is, when the price of oil goes up, so does the loonie, and when the price of oil drops, the loonie drops as well. As the price of oil continued rising over the last decade, the loonie kept appreciating. In fact, the loonie has risen by over
50% in past decade against greenback.
It is often mentioned in the media that the real estate in Canada costs twice as much as in the United States, yet they don't always mention why. Both falling house prices in the US and the rising prices in Canada contributed greatly to the price gap between the two countries. However it was also the rising value of loonie that arguably made the biggest difference. As the loonie and greenback equalized over the last ten years, suddenly the cost of Toronto's real estate went up by 182% in US currency while it only went up by 78% in Canadian dollars.
The gap in housing prices between these two countries is often considered unsustainable by historical measures. For the gap to close, either the loonie has to fall, home prices in US have to rise, or prices in Canada have to fall. For the loonie to fall, oil price has to come down and the only way for that to happen is a deep economic downturn. It may take a decade or more for US home prices to rise up to what they used to be in 2006. Note it was in 2006 when the US and Canadian house price gap started to widen considerably. This leaves us with falling housing prices in Canada as the most likely option for closing the disparity in the short term. How this all will play out is hard to say. All three factors are likely to play a role at the same time. If the oil prices continues to rise, thus raising the value of loonie, it is possible that the gap will change little even if the Canadian home prices decrease. Only time will tell how this plays out.
I can't post the picture of the divergence of Canadian and United States real estate prices as I don't have a permission, but you can view it here. However, below I made few graphs of how Toronto's real estate prices look in US dollars and the relationship between oil price and house price in Toronto in US currency.
It is true that the costs of labor and materials as well as taxes are higher in Canada than in United States. Additionally, Canadian homes require more insulation due to our colder winters than in the States. Now I don't have any means to calculate the weights of all the factors which contribute to higher prices of real estate in Canada than in the US, so I say let's just agree that those factors justify higher home prices in Canada to a certain extent.
At this point, knowing what we know, we have to ask ourselves why does Canada, a country with more land available to its population and smaller income per capita (PPP) than the United States deserve to have real estate cost twice as much? You be the judge, and I am going to finish this article with excerpt from CBC.