Canada's Real Estate Market: A Sustainable Affordability Bubble?

Canadians have been seeing a lot of speculation about the future of the country's real estate market in recent months with "experts" falling on both sides of the fence; some saying that the market is fine, healthy and not due for any meaningful correction and others certain that the market is in for a big correction, especially because it is one of very few markets among developed nations that has not seen a price readjustment.  In this posting, I will present pricing data, measured by affordability, showing which Canadian markets are most affordable and which real estate markets are out of teh reach of prudent consumers.

Demographia recently released its 8th Annual International Housing Affordability Survey: 2012 in which they measure the affordability of housing in seven nations including Australia, New Zealand, Ireland, Hong Kong, Canada, the United Kingdom and the United States.  As I've noted on previous occasions, Demographia has a relatively unique way of measuring housing affordability by comparing the price of a median home to the gross (before tax) median annual household income in that market.  By dividing the median price by the median income in a given market, Demographia ends up with the median multiple for that market which gives a sense of affordability.  Historically, median multiples for the nations in the study  have ranged from 2.0 to 3.0 with 3.0 being the upper limit of affordability.  Demographia then takes the range of median multiples and breaks them down into one of four categories as shown on this chart:

In general, the Demographia Housing Affordability study has shown that housing in Canada is becoming less affordable, particularly in some markets with Vancouver being a standout example.  Of the six major real estate markets in Canada (population greater than 1 million people), three are considered moderately unaffordable and 3 are considered severely unaffordable as shown here in comparison to the other nations in the study:

Of all 325 markets in the study and 35 in Canada, 9 (26 percent) of Canadian markets were considered affordable, 19 (54 percent) were considered moderately unaffordable, 1 (3 percent) was considered seriously unaffordable and six (17 percent) were considered severely unaffordable.

Here is a chart showing the 15 most affordable real estate markets in Canada in ascending order: 

The final column in the chart shows the change in affordability since late 2006, the year that the United States' real estate market began its plunge.  Notice that only one market (St. Catherines - Niagara) has become relatively more affordable with three markets moving from affordable to moderately unaffordable.

Here is a chart showing the 15 least affordable real estate markets in Canada in descending order:

Vancouver, as always, is the standout for lack of affordability with a median multiple of 10.6, one of the highest in the entire seven nation study.  A total of four markets in British Columbia are among the least affordable communities in the nation, followed by Toronto and Montreal which are both considered severely unaffordable.  Toronto, Montreal, Quebec City, Saskatoon and Vancouver show the greatest decreases in affordability among the 15 most unaffordable cities in Canada with Vancouver, once again, being the standout.

In summary, it is my suspicion that the current level of affordability in Canada's real estate market is unsustainable, particularly if the country follows the rest of the world into a recession.   With only 26 percent of the nation's 35 real estate markets falling into the affordable category and 17 percent falling into the severely unaffordable category, prices over the long-term are unsupportable.   People simply will not be able to sustain their current excessive levels of debt once interest rates start their climb back to historical norms.   It is only the Bank of Canada's ultra-low interest policy that has kept the "bubble" alive as long as it has been despite all of Mr. Carney's warnings about consumer over-indebtedness.