Wednesday, February 17, 2016

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.   


  1. Demographia surveys only eight countries plus Hong Kong. It's limited. Also, its data is flawed. Check out this critical piece at Demographia is full of errors. Look elsewhere for your guide on global housing affordability.

  2. Yes, but these multiples are historic in nature and the last several decades had interest rates that were abnormally high (i.e. double digits or even high single digits). A multiple of 3 25 years ago is not the same as a multiple of 3 today.

    1. I should at that carrying costs as a % of income have held steady or even trended downward in most markets. I am not discrediting the fact that low interest rates are aiding in this, but the fact remains that homes are as affordable as they have ever been in many parts of Canada.