Canada's housing bubble is a cautionary tale for the US real estate market

• Canada's housing market is in overdrive as prices soar to record highs.
• That's because, like in the US, there aren't enough homes for sale to meet demand.

Canada's red hot housing market is in overdrive as housing affordability sinks — it sounds too familiar to Americans.

The national average home price in Canada climbed to $816,720 CAN in February, hitting an all-time high according to the Canadian Real Estate Association, and 50% higher than that of the median US home price when converted to USD. The 20.6% year-over-year growth is attributed to a home buying frenzy — like that in the US — that was spurred on by record low mortgage rates in 2020.

In both the US and Canada, the problems in the housing market boil down to the simple fact that there just aren't enough homes to house everyone who wants to buy, following years of underbuilding and investors entering the market looking to make a profit.

"Ultimately, to tame housing affordability challenges, more homes and apartments must be built," Robert Dietz, National Association of Homebuilders chief economist, told Insider.

Although home prices showed signs of cooling in March, Canada's tremendous lack of available housing remains a hurdle stabilizing the market. To aid the recovery, Prime Minister Justin Trudeau's government last week announced a two year ban on home purchases by foreign investors, among other measures, in hopes of cooling demand in the oversaturated housing market.

But housing experts say the move is just not enough.

"I don't think prices are going to fall as a result, though I do think it takes away at least some of the competition in what is the most competitive market in Canadian housing history," Simeon Papailias, founder of real estate investment firm REC Canada told Bloomberg, adding that it's unlikely that a "two-year band-aid" is going to have an impact on a fundamental lack of homes.

As housing affordability plummets in Canada, it's impossible to ignore the similarities to the US real estate market. Whatever side of the border you're on, one thing is clear — housing availability is shockingly low in Canada and the US. If more homes aren't built to meet housing demand, the US could follow in Canada's footsteps.

Canada's housing bubble could be the future of the US real estate market

Canada may have the lowest average number of homes available per capita – but America isn't doing too hot either.

According to HUD and the US Census Bureau, housing starts — the number of privately owned new houses on which construction has been started in the US — increased 6.8% in February. However, the NAHB estimates there are still 152,000 single-family units that have yet to begin construction. This is up 24.6% from a year ago and marks a four-month high of delayed starts.

Dietz said that's helping. "However, the availability of materials, lumber, labor and lots remain key headwinds, with access to labor in particular likely to become more challenging in 2022," he said.

Employment has also been a huge challenge for the US homebuilding sector, which has experienced some of the worst job losses of the pandemic. Between December 2019 and December 2020, the field lost nearly 441,000 jobs. Although the construction employment rate is up 5.15% since Feb 2020, job losses have been damning.

According to the Home Builders Institute, 2.2 million new workers are needed within the next three years to meet housing demand. Until employment improves, the NAHB estimates the US real estate market lacks at least one million single-family homes.

While there are notable differences between the US and Canadian real estate market, the lack of available home for sale has prompted experts to discuss a possible bubble in the US market as well. As affordability plunges in Canada, it stands as a reminder of how inventory can offset a real estate market. With US housing supply remaining near four-decade lows and home prices surging to $405,000 in March, America may not be too far behind its northern neighbor.

The solution for both countries, Dietz said, is simple in theory, but harder in practice:

"The key to improving housing affordability is increasing inventory."