House Price and Income Inequality in Canada

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This study examines how residential house prices affects income inequality.

Income inequality has been increasing in Canada almost exclusively in cities. Increases in inequality were posted in 2014 and covered major cities since 1982. They were compared to the national average:

Calgary an increase 4 times higher
Vancouver an increase 2.5 times higher
Toronto an increase 3 times higher

During the same period, average house price in Canada has increased significantly from around $150,000 in the late 1990s to around $500,000 in recent years. The rental market also saw a similar trend. The average rental price almost doubled for a two-bedroom apartment, from $568 in 1992 to $962 in 2016 (CMHC Rental Market Report).

This study uses the Gini coefficients to measure and see if house price escalation could be worsening income inequality. Since housing costs account for a large proportion of household income and both total nominal household income and residual income in calculating the Gini coefficients.

Author:: CMHC
Document Type:: PDF
Date Published:: November 2, 2020

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Key highlights

Rising home prices may lead to a displacement problem associated with gentrification in major cities.

There is a negative relationship between the house price and the Gini coefficients. We see how an increase of 1% in the median sale house price leads to a reduction in the Gini coefficient. It’s about 6% for the nominal income and about 4.5% for the residual income.

This implies that income inequality improves as result of price increase.

House pricing negatively affecting income inequality doesn’t imply that house price escalation is a catchall solution for income inequality.

We need to research this further to explain the relationship.

One theory is that high-skilled workers are likely to:

flow into high productivity areas
increase income level in the region
generate fierce competition for scarce land

This upward pressure on house prices further prevent low-skilled workers from moving into the area. This results in less income ranges and therefore an improved income inequality measures (lowering Gini coefficients) for the area.

The findings from this study serves to start a discussion among policy makers on the contradicting objectives of different policies at play.

This report is part of the Research Insight series. Read the full report House Price and Income Inequality in Canada: The Instrumental Variable Approach (PDF).