Demographia recently released the 11th annual edition of its international housing affordability survey. In this posting, I will be focusing on Demographia's analysis of the Canadian real estate market, information that is particularly critical given that valuations (and mortgage debt) in some of Canada's metropolitan markets have reached stratospheric levels.
Demographia measures housing affordability for 9 nations, including Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States. Demographia uses a measure called the median multiple which is defined as the median price of a home in a given market divided by the median household income in that market or:
Median Multiple = Median Price of a Home
Median Household Income
This gives us a good sense of how affordable housing is an a particular market. Historically, where the median multiple ranges between 2.0 and 3.0, housing in that market is considered "affordable", that is, the mortgages required to buy housing are quite easily serviced by home owners. However, as we all know, household incomes have remained relatively stagnant in many Western nations over the past two to three decades. Growth in housing prices has far outstripped growth in household income, meaning that housing has become increasingly unaffordable because mortgage payments rise as a percentage of household income. This means that the median multiple is rising as housing prices rise and incomes stagnate. Demographia uses the median multiple to further define housing in unaffordable markets as such:
Now, let's compare housing affordability for all markets, both larger and smaller, for all nine nations in Demographia's analysis:
Of the 35 largest markets in Canada, only 5 (14.3 percent) are considered affordable, 16 (45.7 percent) are considered moderately unaffordable, 9 (25.7 percent) are considered seriously unaffordable and 5 (14.3 percent) are considered severely unaffordable. On average, Canada's 35 largest markets have a median multiple of 3.9 or moderately unaffordable. This compares to 3.4 for the United States, 5.0 for the United Kingdom, 5.2 for New Zealand and 5.5 for Australia.
Now, let's look at some details. Here is a table showing Canada's ten most affordable real estate markets showing how the median multiple has changed between 2013 - 2014 and the year-over-year change in median price:
Here is a table showing Canada's ten least affordable real estate markets:
It is interesting to see that four of the ten least affordable real estate markets in Canada are located in British Columbia.
Here is a graph showing how the median multiple for Vancouver has increased since 2004:
Here is a graph showing how the median multiple for Toronto has increased since 2004:
Other than a very short-term levelling off in affordability during 2007 - 2008, in both cities, it has become increasingly difficult for potential buyers to purchase a residence. Of all 378 markets in nine nations in the Demographia study, Vancouver had the second-least affordable real estate.
Now, let's switch countries for a moment. Here is a graph showing what happened to the median multiple in Los Angeles as it rose during the housing boom and collapsed during the housing bust:
This shows us that even when it looks like housing valuations can rise without end, a significant correction can occur very quickly when real estate becomes far too expensive for households. In several of Canada's housing markets, current median multiple levels are unsustainable over the long-term, particularly if mortgage rates rise by even a modest amount.