Friday, February 11, 2011

Demographia - International Housing Affordability Survey

Demographia released its 7th Annual Demographia International Housing Affordability Survey: 2011 for major metropolitan markets in Australia, Canada, Ireland, New Zealand, the United Kingdom, the United States and Hong Kong.  The data in the survey is current to the third quarter of 2010 and covers 325 markets in the aforementioned 7 nations including 82 major metropolitan markets with populations in excess of 1 million people.  The report is authored by Joel Kotkin, a Distinguished Presidential Fellow in Urban Futures at Chapman University.

Housing affordability is critical to the welfare of families around the world.  Since the highest single household expense is generally for housing, markets where housing costs form a greater portion of total expenditures means that households have less money to spend on other necessities.  As well, housing affordability has changed in many markets around the world.  House price escalation has outstripped household income in many areas of the world, making housing increasingly unaffordable in many markets in Australia, New Zealand and the United Kingdom.

Demographia defines affordability as the median multiple as calculated by dividing the median house price by the gross annual median household income in that market.  The median multiple is then divided into affordability rating categories as follows:


Note that the study considers homes "severely unaffordable" where the median house price is greater than 5.1 times the median household income.

The authors of the survey notes that in certain specific markets within some major urban centres and some suburban areas,for example New York City's Upper East Side, Vancouver's Kitsilano and London's Mayfair, can tolerate high ratios because markets in these areas are of interest to high income, high net worth, "elite" clientele who are basically unconcerned about the price of real estate but that these neighbourhoods are exceptions to the affordability rule.  That said, in general, the study found that housing in most markets within Canada and the United States to be the most affordable and that markets in the United Kingdom, Australia and New Zealand tend to be pervasively unaffordable.  

In looking at the statistics for the 82 major metropolitan markets (over 1 million people), Demographia found that there were 20 affordable major markets, 25 moderately unaffordable major markets, 13 seriously unaffordable major markets and 24 severely unaffordable markets.  All 20 affordable major markets were located in the United States and of the severely unaffordable markets, the United Kingdom had nine (out of sixteen), Australia had five (out of five), the United States had five (out of fifty-two) and Canada had three (out of six).  As well, New Zealand's only major market, Auckland, was severely unaffordable as was Hong Kong.  Here is a chart showing the housing affordability for major urban markets by nation:


The most affordable major market in the United States was Atlanta with a median multiple of 2.3 and a median house price of $129,400 followed by Indianapolis, Rochester, Cincinnati, Cleveland and Detroit.  Last year's most unaffordable major market, Vancouver, Canada has fallen to third place after Hong Kong and Sydney, Australia, last year's second least affordable major market.  Here are the median multiples for some of the world's major markets and their rank:


If we look at all 325 markets studied in the Demographia report, Australia has by far the most unaffordable real estate outside of Hong Kong.  Of the 32 markets, 27 are considered severely unaffordable with a national median multiple of 6.1.  Here is a graph showing how housing has become increasingly unaffordable over the past 30 years in Australia’s major markets:


Overall, of the seven nations studied, the most affordable housing is in the United States; of the 211 markets studied, 106 have affordable housing with only 15 being considered severely unaffordable with a national median multiple of 3.0. 

Here is a chart showing overall housing affordability in all 325 markets sorted by country and affordability:


The most affordable housing, when looking at all 325 markets, was found in Saginaw, Michigan which had a multiple of 1.6 followed by Flint, Michigan and Youngstown, Ohio  which both had multiples of 1.7.  The most affordable housing in Canada was found in Windsor, Ontario which had a multiple of 2.1 (10th place overall).  No markets in New Zealand, the United Kingdom and Australia had multiples of 3.0 or less (which are defined as affordable).


Here is a chart showing the three most affordable markets in the United States and Canada and their overall ranking:



The most severely unaffordable housing was found in Hong Kong which had a median multiple of 11.4.  This has only been exceeded twice before in the seven years that Demographia has issued their report, both times by Los Angeles which came in at 11.5 in 2007 and 11.4 in 2006.  Here are the three most unaffordable markets in each nation (other than China/Hong Kong).  Notice how housing is extremely unaffordable in the least affordable markets in Australia compared to the overpriced markets in the other four nations:



It is well worth the time to read the entire Demographia report or, at the very least, look through the charts to see where your own market fits into the overall affordability picture.  Most of us already have a sense of how affordable housing is in our home city but it is most interesting to see how Demographia uses median household income to define housing affordability, a most practical way of measuring whether or not average households can afford their own housing.  Since incomes rarely drop (except in cases of unemployment or underemployment), it is enlightening to see how housing has become far less affordable as housing prices have escalated well beyond increases in income.  One certainly has to wonder how sustainable current house prices will be in markets where Demographia considers median house prices to be severely unaffordable; certainly housing will not become more affordable as a result of major increases in household income.

In future postings, I will examine some of the markets found at either end of the spectrum.

31 comments:

  1. Great posting. Another good way to see housing bubbles is just check out rents prices. If rent is low in relation to housing then you got a bubble going on.

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  2. Hmmm... Saginaw, Flint & Youngstown most affordable... and what are the respective unemployment rates?

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  3. Saginaw - 10.2 percent
    Flint - 11.8 percent
    Youngstown - 10.4 percent

    Not as bad as one would think!

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  4. Junkie, thank you very much for posting this. I am a commercial real property appraiser and this is by far the most interesting resource I've come across in a while. I'm going to share the Demographia report as well as your post with my colleagues. Again, thanks and Cheers!

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  5. You're welcome Paul. It is an interesting way to look at the housing market and really helps with understanding affordability.

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  6. I have a few concerns about this article though it does follow my general train of thinking.

    Comparing house prices to income is not as solid a comparison tool as you think. This method assumes the traditional western model of home ownership, of buying a house young, building up equity and then selling to fund your twilight years, where your children will also be caught in the same mortgage cycle. Worldwide, this is a pattern not shared. Immigration is slowly changing patters domestically as well. In Canada, we will slowly see a shift to multi-generational homes, the globally dominant housing solution. A family will buy a home, live in it and their kids will inherit it, saving the children the costs of repeating the mortgage cycle. By this standard, home prices are not so bad, given that values mean much less as no one intends to sell. Also as part of this trend of multi-generational homes, is multiple incomes supporting the property. Adult children tend to live in their homes until marriage so their are many years of savings to be built up in the event of multiple children forcing someone to move out of the house.

    Cultural assumptions and their shifting micro-economic patterns will force us to rethink traditional valuation methods.

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  7. I can't argue with your logic; the Demographia study is just another way of examining affordability and in general tells us which markets are WAY over-priced and where bubbles may exist.

    Thanks for your comments.

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  8. This is a very interesting analysis, but there are some aspects of house buying that affect prices that are not related to earnings. For Vancouver the most important is climate and then immigration. There are many people living in million dollar homes in the Vancouver area who could never afford them based now on their income.There are always richer people somewhere willing to move here regardless of cost.

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  9. Saginaw and the rest of Michigan is the arm pit of the USA... Who cares if they give the homes for free.
    Granted, some areas seem out of whack. I like the local income vs the local price ratio but we can't take this for a rule: Edmonton is out of whack at 3.5 but Montreal is still cheap at 5.2

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  10. OnlyTheBankersLaughFebruary 17, 2011 at 1:03 PM

    Wow, Anonymous. Of course, Canada is the next Switzerland in terms of multi-generational ownership. Ever been thru a downturn in real estate like USA is experiencing where Seattle has dropped 31% and continuing down? Vancouver's drops have been legendary in terms of delusion boom and reality bust. Seattle has more economic strength and even better climate. Perhaps, you may be in real estate where it's never a bad time to buy and if the numbers don't work, whine to the government and all media and begin using different stats as facts. Wheh government finally stops manipulating on the backs of taypaxers, we will all be hurt. Taxpayers have taking on the very real risk for people without money. That's gonna come out in the wash. But, I guess some smug folks in Canada think it's different here in Canada.

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  11. Ever wonder where all the speculators go when the wind changes? These are the folks who're now omniciently predicting the inevitable deflation of the housing bubble, and no doubt expecting to capitalize on this event!
    Nobody gets it completely right or completely wrong either. The reality is always somewhe in between.
    When I look to the middle ground I see slightly positive and/or negative real price growth in housing for the next significant period, bolstered by stubbornly low interest rates, continued net immigration and gradually increasing wages.

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  12. One underreported story in my view is the functional obsolescence of post-WWII and 1950's housing, especially as working class Baby Boomers retire. These relatively inexpensive houses still stand unsold and add to the inventory totals but are no longer viewed as desirable by young homebuyers. People here in the urban Midwest are still trying to sell highly unremarkable, low-end Cape Cods for $125K when the reality is they'd be lucky to get out at half the asking price.

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  13. Not particularly useful for anything really.

    Its easy to get carried away being 'technical' and using a flood of stats to support some notion or other; add emotion and you don't really get anything of any value.

    Interest rates are severely manipulated and are determining what prices are doing.

    Loans vary in cost hugely depending on deposit size and the subsidy averages out at £600/month for the 14million mortgages in the UK. Imagine what the btl landlords and wealthy are getting.

    Unless you start looking at inflation and wage rise numbers, this report is going to be irrelevant for the U.K.
    With unemployment support and mortgage support so called 'affordability' categories are meaningless.
    Current policy is to inflate away the colossal private debt.

    However because wage rises will happen in highly selective industries, some expensive areas will remain just that while others will see an adjustment only when subsidies are removed (never?).

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  14. Not every purchaser requires bank finance, shock horror, desirable areas tend to attract the loan free buyers, median price multiplier garbage not worthy of anyone`s time.

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  15. Best article I've ever read on gagging house affordability. Thanks for the report.

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  16. You are most welcome. I think that most of us have a sense that housing is unaffordable in many markets, we just can't quite put our finger on exactly how unaffordable it is and the Demographia report helps explain the issue.

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  17. I live in UK Devon (Tavistock near Plymouth)-7.5!!! - I think this proves that people will pay anything to live here - it is worth it though!

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  18. Too simplistic. For housing which usually carry a very long term loan, interest rates have a big impact on affordability. Next big factor is down payment requirements. I think if would be more accurate to measure Down payment, minimum annual payment compared to disposable income (after living expenses).

    For this simplistic view, it is only applicable to compare the trends within a particular market over time (assuming there is no significant change in conditions). And with the governments messing (they call it fine-tuning)around with down payment and interest rates, even that simplistic view is too idealistic...

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  19. The Demographia study doesn't consider other markets where bubbles can be happening. Take for example Buenos Aires, Argentina. Used properties have an average price of over U$S 1.500 per square meter. That's something like U$S 140 per square feet.When it comes to new homes, there's nothing you will find for under U$S 190 per square feet. As of today, with the price of a 3 bedroom apt in Buenos Aires, you can probably purchase 3 used condos in Miami.

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  20. A good reason why those mentioned U.S. major market cities are very affordable can be easily explained by their racial demographics. White people are the diminishing minority, or near minority in all of these American cities.

    www.city-data.com

    Another tool to gauge real estate prices are the public schools located in "better" areas:

    http://nces.ed.gov/ccd/schooLSearch/

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  21. The $64,000 question that comes to mind and no one has commented on. Is why on earth do Canada and Australia with their very,very low population densities have more expenisve housing than the US?
    Any ideas?

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  22. The population density in Canada and Australia is NOT low. These countries are very heavily urbanized, amongst the highest in the world. So, the countries are large, but population is very dense were it happens.

    The Toronto area alone has more than 5M people.

    I do think housing in generally overpriced in Canada. I see the same mentality as I saw in the US in 2007. Housing will always go up, its an investment. We are different because of whatever factor. Seriously, immigration and income in the Vancouver is way off in sustaining these prices. If any downturn occurs it will be ugly. If I were there, I'd sell now before its too late.

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  23. "Is why on earth do Canada and Australia with their very,very low population densities have more expenisve housing than the US? Any ideas?"

    Yes, Both Canada and Australia are large land masses with few city choices. Compare to the US and there are more city choices in which to live.

    Now, as others have pointed out those inexpensive cities in the US are viewed negatively (poverty, crime, poor job prospects, unemployment etc..). This diminishes desire.

    Over the past decade the majority of the Australian and Canadian cities place high on global quality of life rankings. This creates desire both from the population within the country and foreigners wanting a better life. As I stated, since there are very few major city choices then the prices naturally skyrocket.

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  24. Australia's realestate collapse is happening at a rapid rate. Most Australian citizens live in a economic situation they neither comprehend nor gain from. The reality is realestate speculators sowed the seeds of their own downfall by bidding up home values using unsustainable leverage and easy credit -- a way of life that become entrenched in Aussie culture until every idiot out there was certain house price can't drop back to past levels when average wages could afford average homes. Check out the ridiculous comments from property spruikers on forums such as the somersoft investor forum to see how entrenched is this "property prices always rise" myth in Australia!

    Australian governments have a woeful record in providing a fair property market. Many European countries have better models that operate more equitably for everyone (the envy of Australia) yet even still, those Euro countries must still bail out their banking systems. Anyway, the moral is no one gains from home price inflation in the end, because bubbles always pop. Sure, we hear claims from the real estate spruikers that prices will rise forever, but when most FHBs are prices out of the market then something has got to give. Now the ponzi scheme is finally collapsing (it was inevitable), and so today's renters and first home buyers will have the last laugh when prices do drop up to 50%, which is happening already in many Australian cities.

    Nomad
    Australia Property Monitors

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  25. Renting temporary apartments seems to be the solution of the millennium. I mean, hotels were the classic option, but now, you can have all the things you have at your own home, just by renting a furnished apartment. It may sound crazy, but is true. I did that last year when I travelled to Argentina and a friend of mine had already told me that she had done it so I started looking buenos aires apartments and now my family is grateful that I made that decision.
    Lindsay

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  26. The problem with the Demographia analysis is that it measures affordability as a simple ratio, when it needs to include an offset:

    Affordability = House Price / (Income - Other Costs)

    Other Costs may vary from place to place, but they are not zero. Consider at a minimum food, education and health care as basic needs, with a guess at minimum per household cost at 20k -- note the poverty line is 22k. Subtract that from the median incomes and you have a very different picture. Suddenly low income places like Saginaw, MI look a lot more like modest income places like Atlanta, GA.

    (redirected here recently via a comment at The Big Picture)

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  27. Thanks for sharing your ideas and thoughts, i like your blog and bookmark this blog for further use thanks again…

    House Australia

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  28. Thanks for the interesting article. A very refreshing point of view. Looking forward to more interesting artiles from you "Political Junkie".

    Cheers.......Gem

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  29. As many have posted, there is more to affordability than home price/income. 1)Each nation has it's own tax structure, which reduces disposable income.
    2)Some nations have benefits for home ownership (tax deductable mortgage rates)
    3) Banks have different laws regulating minimum downpayments and mortgage terms.
    All of these put together can greatly affect the affordability of a home.

    In Canada there were several factors that lead to the boom in housing. There was an increase in the term of the mortgage, there was a reduction in the minimum downpayment and there was a drop in interest rates. Overall, combining these 3 factors adjusted what "affordable" means in Canada. Other nations are the same. So the measurement scale can not be equal accross all nations.

    As someone else posted, these stats are good to show a trend, but not a comparison, or even a determining factor of a bubble.

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