United States Housing Affordability - Demographia's 2018 Edition

While news about the U.S. housing market has been relegated to the back pages of the business section of American online and print news services, there are still some interesting developments that are worth further examination, particularly in some markets.  While housing prices have recovered from the catastrophically low levels that were experienced during the Great Recession, some markets are showing signs of, once again, being severely overvalued, an issue that first occurred in the mid-2000s. 

As I have done for the past few years, this posting will take a look at the most recent version of Demographia's International Housing Affordability Survey for 2018, Demographia's 14th annual report on the state of the housing market in 10 key nations.  Demographia looks at housing markets in Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States which, between them, have 92 major metropolitan markets with populations in excess of one million people.  Among the 92 major markets are five megacities with a population of more than ten million people; Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, Los Angeles and London.  Rather than just looking at raw housing prices, Demographia uses a rather unique measure to determine the affordability of housing, a key measure since declining affordability was the factor that set up the collapse of the housing market in the United States.  Demographia uses a unique measure of affordability called the Median Multiple which is defined as follows:

Median Multiple  =    Median House Price in a Given Market

                                 Median Household Income in that Market

The income used to assess housing affordability is gross, pre-tax, annual median household income.

Demographia goes on to use the Median Multiple to define housing affordability as follows:

Affordable - Median Multiple of 3.0 and less

Moderately Unaffordable - Median Multiple from 3.1 to 4.0

Seriously Unaffordable - Median Multiple from 4.1 to 5.0

Severely Unaffordable - Median Multiple 5.1 and more

Historically speaking, when looking back at decades of records, housing markets are considered to be affordable (and sustainable) when household income is roughly one-third of housing prices.

Here is a table showing housing affordability by nation for all 293 housing markets in the study:

As you can see, when all domestic real estate markets are taken into consideration, the United States had an overall Median Multiple of 3.7 which puts it in the moderately unaffordable category.  In the major housing markets, the Median Multiple was 3.8, again, in the moderately unaffordable category.   Only 49 or 28 percent of the 175 U.S. markets were considered affordable with 67 or 38 percent being classified as either seriously or severely unaffordable.  Despite that, the U.S. housing market still looks quite well valued compared to nations like Australia and New Zealand.

Here is a breakdown of the ten largest housing markets in the United States showing how affordability has deteriorated since the end of the Great Recession:

With that background, let's now look at the ten most affordable housing markets in the United States:

As you can see, many of these markets are located in the former industrial heartland of America.  It is interesting to note that many of America's most affordable housing markets have seen relatively little decline in house price affordability since the Great Recession, largely because the economies in these areas have remained stagnant over the past decade.

Here is a table showing the ten least affordable housing markets in the United States:

While the Median Multiple for eight of the least affordable markets has declined somewhat, the Median Multiples for all of the markets is still well in excess of the 5.1 hurdle that defines "severely unaffordable.  In fact, median housing prices have increased in all but one market (Santa Barbara) and, in the case of San Jose, median housing prices have increased by 16.5 percent on a year-over-year basis. 

The authors of the study note that California has the most "ominous housing market trends in the United States".  A great deal of this is due to decades of highly restrictive land use and environmental regulations that have distorted the state's housing market.  Since 2010, the Median Multiples in the six largest housing markets in California have increased at 7.6 times the rate of major U.S. markets where there are less regulated land use and environmental policies.  Not only are the major California markets suffering from severely unaffordable housing, even the smaller markets are experiencing extremely bleak housing affordability.

One interesting point to note is the median price and household income for both data sets.  In the case of the most affordable housing markets, the average median price is $124,000 and average median household income of $54,060.  In the case of the least affordable housing markets, the average median price is $736,830 and average median household income is $79,620.  When comparing the least and most affordable markets we find the following:

Average median housing prices - 494.2 percent higher

Average median household income - 47.3 percent higher 

I would suggest that this scenario is simply not sustainable, a fact that was learned by tens of millions of U.S. households in the later part of the first decade of the new millennium.

While the United States housing market is, in general, showing that it has recovered from the depths of the Great Recession disaster zone, some of the largest markets are showing the same type of non-sustainable price gains that appeared a decade and a half ago, largely because of this:

Thanks to the Federal Reserve's unfettered and ill-advised beneficence, parts of the United States housing market are once again living in a dream world, a dream that could come crashing down yet again.  

Canada's Housing Affordability - Demographia 2017 Edition

Every year since I started this blog, I have posted an analysis of Demographia's international viewpoint on the affordability of real estate in several of the world's developed economies.  I have already posted on the decreasing affordability of some residential real estate markets in the United States and, in this posting, I want to take a look at the affordability of real estate in Canada's largest markets, particularly those in the Greater Toronto and Vancouver regions.

Demographia uses a unique measure to determine the affordability of residential real estate; the median multiple.  This measure combines both median house prices and median household incomes in a given market to ascertain the affordability.  This is a far better method of defining the affordability of housing than simply looking at price trends which really tell us nothing about whether or not a family unit can afford to buy and sustain mortgage payments.

Here is how Demographia calculates the median multiple:

Median Multiple  =    Median Price of a Home in a Market

                              Median Household Income in that Market

Here is how Demographia defines housing affordability using the median multiple:

Median Multiple of 3.0 or less - Affordable

Median Multiple of 3.1 to 4.0 - Moderately Unaffordable

Median Multiple of 4.1 to 5.0 - Seriously Unaffordable

Median Multiple of 5.1 or more - Severely Unaffordable

Historically speaking, housing markets have been considered to be affordable when the median multiple ranges between 2.0 and 3.0.

The 2017 edition of Demographia's International Housing Affordability Survey looks at affordability in 406 markets in nine nations and found this:

As a whole, when considering all 40 of Canada's housing markets, the median multiple averages 3.9; only 10 or 25 percent of the total are considered affordable with 13 being moderately unaffordable, 10 being seriously unaffordable and 7 being considered severely unaffordable making up the remaining 75 percent.  Canada does have one distinction; it has the third least affordable housing market among all 406 markets; Vancouver with its median multiple of 11.8 falls behind Sydney, Australia at 12.2 and Hong Kong at 18.1.

Here is a graphic showing how most of Canada's major housing markets (population greater than 1,000,000) have become increasingly unaffordable since 2004:

Not surprisingly, all major markets, excluding Ottawa, are considered unaffordable to varying degrees with Toronto and Vancouver standing out from the rest.  In the case of Vancouver, its median multiple has more than doubled since 2004 from 5.4 to 11.8.  

Let's look at some details.  Here is a table which shows the ten most affordable real estate markets in Canada when measured in terms of household income:

As you can see, in Canada's most affordable housing markets, affordability has changed very little between 2016 and 2017.

Now, let's look at a table which shows the ten least affordable real estate markets in Canada when measured in terms of household income:

You can readily see that Canada's least affordable housing markets have become even less affordable over the past year, particularly Vancouver, Victoria and Toronto.  Let's look at the example of Vancouver.  Over the past year, median household income in Vancouver rose by a whopping 1.1 percent whereas the price of a median house rose by 9.8 percent.  In the case of Toronto, median household income rose by a tepid 1.3 percent whereas the price of a median house rose by 16.2 percent.  Obviously, this is not a sustainable scenario, particularly if mortgage rates rise.

As was the case in the United States just prior to the Great Recession, housing markets can correct unexpectedly when it becomes too expensive for a household to sustain its housing lifestyle.  The current levels of median multiples in Canada's largest markets strongly suggests that the valuations in the residential real estate market are unsustainable and will eventually be subjected to correction.

Canada's Housing Affordability - Demographia 2016 Edition

Over the past few years, I have waited anxiously for Demographia's annual "state of the housing market affordability study" formally known as their International Housing Affordability Survey.  In this annual analysis, rather than just looking at housing price data, they look at affordability and relate house prices to household income.  They do this by calculating the median multiple for each market as follows:

Median Multiple = Median Price of a Home in a Market 

                           Median Household Income in a Market

This gives us a far better sense of whether housing is affordable than raw pricing data which does not take into account whether family units can actually afford to buy homes based on their household incomes.

Demographia then divides the median multiples into affordability brackets as shown here:

Median Multiple of 3.0 or less - Affordable

Median Multiple of 3.1 to 4.0 - Moderately Unaffordable

Median Multiple of 4.1 to 5.0 - Seriously Unaffordable

Median Multiple of 5.0 or more - Severely Unaffordable

We can see how sensitive real estate markets are to rising median multiples; a median multiple of 5 tells us that the housing in that market is severely unaffordable and, as we will see in this posting, a median multiple of 5 would look positively spectacular in some of Canada's most over-priced real estate markets. 

Over the past few decades, housing markets have been considered affordable when the median house price ranges from 2 to 3 times the median household income in that market.  Housing markets with median multiples greater than 3 are considered to be less affordable and, as the United States found out just prior to and during the Great Recession, housing markets tend to collapse when families can no longer afford to buy a home because it is out of their price range.  As Canadians are now seeing in both Vancouver and Toronto, house prices have completely decoupled from household incomes with house prices rising two, three or more times faster than household income.  No matter what bankers, realtors and central bankers may tell us, this scenario is unsustainable.

Let's take a brief look at housing affordability ratings for all nine nations in the study so that we can compare Canada's real estate market to its peers:

While Canada's median market has an affordability rating of 3.9 (or moderately unaffordable), we find that only 9 of the 35 markets in the study are affordable with 12 or 33 percent being either seriously or severely unaffordable.  This is concerning, particularly considering that nearly one-sixth of Canada's real estate markets have an (un)affordability rating of 5.1 or more.  Of Canada's six major real estate markets (population over 1,000,000), none are ranked as affordable, two are ranked as moderately unaffordable, two are ranked as seriously unaffordable and two are ranked as severely unaffordable.  Here is a graph which shows how the affordability in Canada's major real estate markets has changed since 2004:

Obviously, this does not particularly bode well for Canadians living in at least two of Canada's largest cities.  In the last decade alone, housing affordability in Toronto has declined by more than 70 percent when compared to household income.  In the cases of both Vancouver and Toronto, housing affordability has declined largely because of government urban containment policies which restrict expansion of urban areas.  This is a well-known factor in creating severely overpriced housing markets.

Let's look at the data.  Here is a table showing Canada's ten most affordable housing markets: 

In eight cases out of ten, the median multiple in Canada's most affordable markets has actually dropped on a year-over-year basis, by as much as 0.7 percentage points in Saugenay, QC.

Here is a table showing Canada's ten least affordable housing markets:

Among all 367 housing markets in the Demographia study, Vancouver has the third least affordable housing after Sydney, Australia (multiple of 12.2) and Hong Kong (multiple of 19.0).  On a year-over-year basis, median house prices in Vancouver have risen from $704,800 in 2014 to $756,200 in 2015, an increase of 7.3 percent.  Over the same timeframe, median household income has risen from $66,400 to $69,700, an increase of 4.9 percent.  This is where the problem lies; housing price increases are consistently outrunning increases in household income.  As well, if you look back at the first table, you'll note that the median household income in Canada's most affordable market, Moncton, NB, is $64,300, only $5,200 or 7.5 less than in Vancouver however, the price of a median home in Moncton is less than one-fifth the cost of a median home in Vancouver.  While those living in Moncton may not be as wealthy on paper, at least they are not "house poor".

As I have done in the past, let's look at how quickly housing market valuations can readjust when they become overheated:

While some lip service is being paid to the overheated housing markets in British Columbia and the Greater Toronto Area by politicians, bankers and central bankers, there is one thing for certain; when young families cannot afford to enter the housing market, there is very little hope that the current valuations are sustainable over the long-term.  Unless things change over the next decade, the number of Canadian Baby Boomers looking to sell their homes will dwarf the supply of potential buyers.  The law of supply and demand and how they impact price is undeniable, unwavering and unforgiving.   

America's Deteriorating Housing Market - Demographia 2016

As I have done every year since I started this blog, I want to give you a summary of the 2016 edition of Demographia's International Housing Affordability Survey.  From my perspective, this is one of the most interesting analyses of housing affordability because affordability is measured in terms that we can all relate to; our household income.  In this posting, I want to take a look at the most and least affordable housing markets in the United States when the median house price in a given market is measured using the median household income in that same market.  In total, Demographia examines the affordability of housing in 367 markets in nine nations including Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States.

Demographia rates housing market affordability using the concept of "median multiple" which is simply the following:

             Median Multiple = Median Price of a Home 

                                        Median Household Income

The affordability rating is defined as follows:

Median Multiple of 3.0 or less - Affordable

Median Multiple of 3.1 to 4.0 - Moderately Unaffordable

Median Multiple of 4.1 to 5.0 - Seriously Unaffordable

Median Multiple of 5.0 or more - Severely Unaffordable

Historically speaking, housing markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States have been remarkably consistent with median house prices ranging from 2.0 to 3.0 times median household income.  Housing markets with a median multiple of 3.0 or less are generally considered sustainable since a median family can easily afford to make the mortgage payments on a house that is considered affordable.  However, in recent years, housing in some markets has decoupled from income levels with housing prices rising at rates that are far in excess of the rate of increase in family income.

To help us put housing affordability in the United States into perspective, here is a table showing the housing affordability ratings by nation for all nine nations in the study, showing us how some nations (particularly Australia, Canada, New Zealand and the United Kingdom) have a significant number of either seriously or severely unaffordable real estate markets:

Now, let's concentrate on affordability in the United States housing market.  Here is the summary for affordability in America's major metropolitan markets (population over 1 million):

Affordable - 13 markets (24.5 percent)

Moderately Unaffordable - 24 markets (45.3 percent)

Seriously Unaffordable - 5 markets (9.4 percent) 

Severely Unaffordable - 11 markets (20.8 percent)

Median Multiple - 3.7

Here is the summary for all United States markets:

Affordable - 75 markets (32.5 percent)

Moderately Unaffordable - 90 markets (39 percent)

Seriously Unaffordable - 37 markets (16 percent)

Severely Unaffordable - 29 markets (12.6 percent)

Median Multiple - 3.5

As we can see, in both major and smaller markets, housing affordability in the United States is, once again, becoming problematic.  When we go back to data from 2007 when the housing bubble was about to burst, Demographia calculated at median multiple of 3.6 for all markets, just above the current level.  At that time, 35.7 percent of all U.S. housing markets were considered affordable compared to 32.5 percent now.  If we go to Demographia's 2009 report, the median multiple for all U.S. housing markets had fallen to 3.2 and 44 percent of all markets were considered affordable, substantially higher than the level is currently.

Now, let's look at the top ten most affordable housing markets in the United States:

As has been the case in the past, the majority of America's most affordable housing markets are located in the de-industrialized belt.  It is also interesting to see that in eight out of ten markets, affordability has improved on a year-over-year basis.

Here are the top ten least affordable housing markets in the United States:

As you can see, America's most severely unaffordable housing markets are located exclusively in California and Hawaii, the sun and sand (or earthquake and volcanic activity) states.  In all markets other than San Diego, housing affordability has declined on a year-over-year basis.  In fact, the situation in California is worse than my table shows; there are seven additional markets in California that are considered severely unaffordable.

Let's close this posting with a graphic that shows the pre-bubble and 2015 housing affordability for America's severely unaffordable markets:

It is quite clear that, despite the collapsing of the real estate bubble during the Great Recession, some of America's largest real estate markets have become increasingly unaffordable by a median family with house prices approximately 75 percent higher relative to income than they were before the real estate bubble formed.  Obviously, California's real estate valuations are increasingly problematic.  While this could be dismissed as a single state issue, with California having, by a wide margin, the largest gross state product in the United States, any significant drop in its real estate prices could have a significant impact on the national economy.