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• Canada is experiencing an even more severe housing crisis than the US.
• Home prices and household debt, because of massive mortgages, are sky-high.
• Some economists say affordability will worsen, while others say prices are on their way down.

The housing affordability crisis in the US is bad — but America's neighbors to the north may have it worse.

The average home value in Canada has more than doubled since 2011. The country is also almost certainly heading toward a recession — if it's not already in one — and the housing market is partly to blame, economists say.

The drivers? Demand has raced ahead of supply. The country simply isn't building enough housing. Mosche Lander, a Concordia University economist, argued that city governments, which largely control housing policy, were "biased towards homeowners and not towards renters," supporting policies that limit homebuilding and keep home values elevated. Investors pouring money into real-estate speculation haven't helped. And record population growth from immigration has only added to demand.

This might sound familiar. The combination of a housing shortage, rising interest rates, and investor speculation have all contributed to a severe housing-affordability crisis in the US, as well. "It's similar, but worse" in Canada, said Mike Moffatt, a senior director at the Smart Prosperity Institute at the University of Ottawa.

After more than 20 years of low interest rates, which pushed housing prices up, Canada's central bank recently raised its benchmark interest rate to a 22-year high of 5% in an attempt to control inflation.

Rising mortgage rates are particularly painful in Canada because the standard home mortgage has to be refinanced after five years and fully paid back after 25 years. This is a key difference between the US and Canadian housing markets since the standard US homeowner gets a 30-year fixed-rate mortgage, protecting them from rate increases for decades.

Partly as a result of this, Canadians are deeply in debt. The country has the highest household debt as a share of gross domestic product in the G7 — and 75% of it is from mortgages.

"We have an imbalance — we have household debt-to-income ratios that are above what the US was before the global financial crisis," said Tony Stillo, the director of Canada economics at Oxford Economics, adding that the result was "unprecedented unaffordability."

Moffatt said he was concerned that as the affordability crisis continues and immigration rates remain high, Canadians would blame high prices on immigration and seek to limit migration. Recent polling has indicated that a growing share of Canadians feel this way, threatening the government's liberal stance on immigration policy. But immigration is just one of many factors at play — Canada's housing crisis far preceded the rise in immigration.

"It's starting to cause backlash here, you're starting to see anti-immigration sentiment," Moffatt said.

But unless things get dramatically worse in Canada, economists say, American policymakers won't be spooked.

"If the market doesn't collapse, then America Jr. just kind of remains an interesting story, but not a policy lesson," Lander said.

Economists aren't predicting a repeat of the American housing-market collapse of 2008 in Canada. The Canadian banking sector is more closely regulated than the US's. Lander said since a handful of major banks dominated residential mortgages, there was less competition and, therefore, less risky behavior than was common in the early-aughts US housing bubble when it came to lending.

With mortgage rates so high, home sales have declined recently. In October, home sales fell 5.6%. As a result, home prices overall have flattened somewhat. Stillo said he believed Canada's housing bubble had been slowly "deflating" for the past 18 months despite an upswing in prices earlier this year.

"It's not a disorderly bursting, but definitely deflating, in my opinion, since the spring of 2022," he said.

Despite mortgage rates soaring last year, US housing prices only briefly declined for about five months before resuming their rise. This is in part because of the US's fixed-rate mortgages, which discourage those with low rates from selling their homes and signing up for today's much higher rates with a new home. This leads to low inventory, exacerbating supply issues.

The situation is so desperate that many Canadians are celebrating the drop in prices. Seventy percent of respondents to a recent Nanos Research/Bloomberg News poll said they would be "happy" or "somewhat happy" if home values declined. This is despite the fact two-thirds of Canadian households own their homes and could see housing equity drop alongside prices.

But there isn't consensus on whether or when Canada's housing bubble will burst — or even whether there is a bubble. Lander said there was no end in sight. While housing prices have flattened recently as demand softens, he said they showed no sign of significantly declining. He said that when the Canadian central bank lowers interest rates, which is expected as the recession deepens, that'd only juice demand for homes.

"Even if housing prices come down, it's not going to be towards anything reflecting market value — that bubble will still be there," Lander said. "If the market hasn't imploded when interest rates are at a 25-year high, when those rates start coming down, the market is going to take off again."

Moffatt said he didn't think Canada had a housing bubble — he predicted that while prices were and would be volatile, they'd continue rising because the country simply doesn't have enough homes.

Like Americans, Canadians are increasingly worried about housing costs. Recent polling indicated inflation was their top concern, closely followed by housing.

Canada's federal government has attempted to dampen demand and encourage home construction. Earlier this year, the government passed a few new laws, including barring most foreigners from buying homes in the country for two years, taxing investors who buy and quickly flip homes for a profit or speculate, and taxing vacant homes. While the measures have slowed demand, Lander said, they're not enough to reduce prices.

"The government's never going to be able to legislate their way to fair market value, so it's going to have to be something that's eroded away over decades," Lander said.

Watch: One in every 10 Americans moved during the pandemic. Here's where they went.

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