Friday, January 25, 2013

Canada's Housing Market Affordability

The fine researchers at Demographia have once again released their annual International Housing Affordability Survey comparing housing affordability in 337 metropolitan markets throughout Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and Australia.  In this posting, I'm going to concentrate on the affordability of Canada's housing market as a whole when compared to the other nations in the study and then focus on the country's most and least affordable markets.

Let's open by looking at how Demographia defines housing affordability.  Demographia uses the term "median multiple" which is defined as the median house price divided by the median gross before tax household income in that market.  It then divides the median multiple into four segments based on the size of the multiple as shown on this chart:

Basically, where the median price of housing is less than 3 times the median household income in that particular market, housing is considered affordable.  Where the median price of housing is 5.1 times the median household income in that market, housing is considered severely unaffordable with steps in between the two.

Overall, housing affordability in the nations studied changed very little from 2012 with the most affordable housing markets being found in Canada, Ireland and the United States (with some obvious Canadian exceptions as you'll see further on) and the least affordable overall housing markets being found in Australia, New Zealand, the United Kingdom and Hong Kong as shown on this chart which shows the affordability of major metropolitan markets:

...and this chart which shows all of the markets for all nations:

Even though Canada's national median multiple for major metropolitan markets came in at 4.7 and all markets came in at 3.6, Demographia still considers Canada's real estate market to be moderately or seriously unaffordable on the whole, depending on whether or not you live in a major metropolitan area.  Admittedly, however, on the whole, Canada's real estate would appear to be a great deal more affordable than Australia, New Zealand and the United Kingdom, all of which have average median multiples in the severely unaffordable range.

You'll notice on the second chart, that out of 35 markets, Canada has 8 that are affordable (22.9 percent), 17 that are moderately unaffordable (48.6 percent), four that are seriously unaffordable (11.4 percent) and six that are severely unaffordable (17.1 percent).  By way of comparison, the vastly realigned prices in the United States real estate market have resulted in 46.3 percent of markets being affordable and only 7.4 percent being severely unaffordable.  In the worst case, Australia, no housing markets are either affordable or moderately unaffordable and 76.9 percent of markets are considered severely unaffordable.

The eight affordable real estate markets in Canada include Fredericton, Moncton and St. John, New Brunswick, Windsor and Thunder Bay, Ontario, Trois Rivieres and Saguenay, Quebec and Charlottetown, Prince Edward Island.  The six severely unaffordable markets include Vancouver, Kelowna, Abbotsford and Victoria, British Columbia, Toronto, Ontario and Montreal, Quebec.

Here is a listing of the most affordable markets, showing the year-over-year changes in affordability:

Here is a listing of the least affordable markets, also showing the year-over year changes in affordability:

Let's take a brief look at Canada's most unaffordable market and the second-least affordable market in the study.  Here is a graph showing the median multiple price of a home in Vancouver since 2005:

Over the eight year period, housing prices have risen from $373,000 to $621,300, an increase of $248,300 or 66.6 percent.  Note that between 2006 and 2012, the median household income in Vancouver rose by a measly 15.4 percent, hardly keeping up with the rise in the cost of purchasing a home.

Here is a graph showing what has happened to Vancouver's median multiple over the same timeframe:

This past year, 2012, was the first year in the past eight that the median multiple has shown any sign of slowing its relentless climb.  How quickly can this multiple fall?  This graph shows what happened to the median multiple in Los Angeles, one of America's hottest real estate markets before the bottom fell out:

And yes, the people in Los Angeles thought that prices would never drop!

One thing that I have noted over the years that I've been referring to the Demographia statistics is how slowly household gross incomes have risen.  While housing prices have risen dramatically, median household incomes have barely budged and, in some cases, have actually dropped from 2011 to 2012.  It's almost like the past decade has been the perfect storm for housing affordability; stagnant wages accompanied by rising demand for housing pumped up by our current ultra-low and tempting interest rate environment.

That hardly makes for a sustainable situation, does it?


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