In eclipsing the American middle-class as the world’s richest, is the increasing wealth of the Canadian middle-class largely due to a housing bubble?
One word that doesn’t appear in the article, however, is housing. The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened)…
One year ago, Matt O’Brien calculated that Canada’s price-to-rent ratio was the highest among advanced economies, making it the “biggest housing bubble” in the world. Canada’s historic housing boom (and our historic bust) comes at the precise moment in history that they pass us to grab the title of World’s Richest Middle Class. Just a coincidence?
Maybe. As the LIS data in the Upshot article shows, Canada’s median earner has been gaining on America for decades, powered by a strong service economy, supported by a disproportionately large energy industry. Remarkably, U.S. GDP-per-capita has been more than 15 percent richer than Canada’s for the last 25 years (see graph below), even as the median American worker has fallen behind the median Canadian earner. That’s a pretty clear indictment of U.S. income inequality…
Still, as many economists like Atif Mian and Amir Sufi have have argued, strong housing markets support middle-class income growth just as housing busts wreck middle-class income growth. The effect can be direct (more houses means more construction jobs*) and indirect (when families feel richer from rising housing prices, they spend more across lots of industries, raising incomes). As Reihan Salam writes, “the central driver of the decline in employment levels between 2007 and 2009 was the drop in demand caused by shocks to household balance sheets.”
Housing is an important factor in a middle-class lifestyle from being able to own a house (more important in certain places like the United States as a sign that “we’ve made it” as well as providing for one’s family) to affording a good neighborhood (which is often associated with lots of other good outcomes like better schools, less crime, more local resources) to paying relatively less for housing than those with lower incomes.
All that said, there is no guarantee that housing will be a significantly positive financial investment in the long run. And what happens in Canada if such a housing bubble does burst?