Monday, January 30, 2012

Demographia International Housing Affordability Survey

Demographia has released its 8th Annual International Housing Survey, a study that I have posted on for the past two years.  Demographia looks at 325 metropolitan housing markets in 7 nations including Australia, New Zealand, the United Kingdom, Ireland, Canada, the United States and Hong Kong.  As I have noted before, I find the approach that Demographia takes to housing affordability rather unique.  Demographia uses the "median multiple" as a means of rating housing affordability; the median multiple is defined as the median house price divided by the gross (or before tax) median household income in a particular market.  Once the median multiple is calculated, each housing market is then divided into affordability categories as follows:

Looking back in time, the median multiple was very similar among all of the nations in the study (excluding Hong Kong) with median house prices generally ranging from 2.0 to 3.0 times median household income.  Such is no longer the case; price increases in certain markets continue to escalate well beyond growth in household income, making it less and less likely that those who wish to buy a home in the future will be able to afford the luxury, unless there is a rapid decline in selling prices.  Housing affordability appears to be continuing to deteriorate among the nations in the study with only two exceptions; the United States and Ireland.  Unfortunately, the realignment of prices to more affordable levels in both countries has been accompanied by huge economic repercussions, most of which are still working their way through the moribund American and Irish economies.

Looking back to last year's report, housing affordability by nation has changed very little with the most affordable housing being found in the United States, Ireland and some markets in Canada and the least affordable being found in the remaining Canadian markets (generally the larger markets), the United Kingdom, Australia and New Zealand.

Here is a table showing the distribution of housing affordability by nation for the 81 major metropolitan markets (major markets have a population in excess of 1,000,000 people):

All of the affordable markets were in the United States, 16 out of 20 moderately unaffordable markets were also found in the United States with only 3 in Canada and 1 in Ireland, despite the severe price declines in its market.  All of Australia's 5 major markets are considered severely unaffordable, 3 of Canada's 6 major markets are considered severely unaffordable and, of the 16 major markets in the United Kingdom, 8 are considered seriously unaffordable and 8 are considered severely unaffordable.  Overall, Australia has the highest national median multiple with a value of 6.7 followed by New Zealand at 6.4 and the United Kingdom at 5.0.

Here is a table showing the distribution of housing affordability by nation for all 325 metropolitan markets in the study:

The United States had the vast majority of affordable markets with 117 out of 211 (or 55 percent) of its markets being affordable for a national median of 3.0.  Only 14 markets out of 211 (or 6.6 percent) in the United States were considered severely unaffordable.  Canada had 9 out of 35 markets (or 25.7 percent) fall in the affordable category with 6 out of 35 (or 17 percent) being considered severely unaffordable for a national median of 3.5.  The United Kingdom had no markets in the affordable category and only 1 out of 33 in the moderately unaffordable category.  The United Kingdom had a rather large 20 out of 33 markets (or 60.6 percent) falling in the severely unaffordable category for a national median of 5.1.  Australia came in with the overall lowest housing affordability (excluding Hong Kong) with no markets being considered either affordable or moderately affordable and 25 out of 32 markets (or 78 percent) being considered severely unaffordable for a national median of 5.6, well into the severely unaffordable category.

Here is a chart showing the top ten least affordable markets and the top ten most affordable markets among the nations in the study along with median prices for each market (please keep in mind that while prices may look higher in less affordable markets, it means that median household gross income is also lower, raising the multiple):

Notice how the most affordable housing markets are mainly in the de-industrialized industrial belt of the United States, particularly Michigan and Ohio?  That is an extremely painful way to get any housing market back to reasonably affordable levels.

Demographia notes that the lack of housing affordability is often linked to the implementation of more restrictive land use regulations.  This is a subject that I posted on here.  As land use becomes more restricted, the prices for land are pushed artificially high as a result of false scarcity; this leads to overly competitive marketplaces for raw land.  With a lack of new developable land coming onto the market, the price of existing developable land rises well above what it should, adding an unnecessary premium to the cost of housing.  As I showed in my posting, overly regulated real estate markets have added premiums of up to $239,100 in the case of San Diego and $90,700 in the case of Washington, D.C. - Baltimore.

I particularly liked this quote from the Demographia study:

"As housing affordability has deteriorated, there has been a tendency on the part of housing industry and financial market analysts to "cheer on" abnormally high house price increases as if housing were a commodity market, like gold."

One need read no further than reports from local and national real estate boards for examples of their cheerleading, particularly from CREA in Canada, where we are continually reminded that high and rising prices are sustainable with only the smallest of corrections potentially in the offing .  What real estate boards fail to realize is that a healthy and sustainable real estate market is one in which the vast majority of households can afford to enter the housing market and remain there comfortably if interest rates rise and house values drop.  Such was not the case throughout many markets in the United States and I suspect that many markets in Canada, the United Kingdom and Australia will suffer the same fate when interest rates return to historical levels or Part 2 of the Great Recession becomes entrenched.

I find the Demographia study particularly interesting because it tells us which real estate markets are still overheated and may well foretell which markets could experience a rather hefty price readjustment.  The American and Irish situations with real estate price readjustment shows us just how painful that process can be. 


  1. I think you are confusing household income and average median income ... The current Halifax data shows avergae price as 4.32 times full time male income and their long term average is almost exaxtly 4..
    Secondly a houselhold now in aboout 70% plus of cases has 2 earners in 1970 that ratio was much much lower, so the oft quoted 3 times is not as relevant as it used to be..

  2. Interesting but...why these specific countries? What about, for example, Germany or Brazil?