7th annual Demographia Housing Affordability survey released
Demographia has released its 7th annual housing affordability survey. The report examines the housing markets across the English speaking world by comparing the mean multiple (essentially the house price to income ratio) of various cities, highlighting land use regulations, and looking at other factors that influence price.
You may recall that last year’s report gave Vancouver the dubious distinction of the most unaffordable city in the English-speaking world. Vancouverites might take some comfort in the fact that the crown has now been passed on to Sydney, Australia. Hong Kong also has a higher median multiple than Vancouver, but this is the first year it was included in the survey.
There’s a ton of data and excellent discussion, so it is well worth the read. Some of the key quotes and charts:
“Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been 3.0 or less times median household incomes in the principal affordability indexes.
… This affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in the past decade in Australia, Ireland, New Zealand, and the United Kingdom and in some markets of Canada and the United States.”
Canadian large centres deemed seriously unnaffordable
The survey rates the affordability of housing using the following categories:
The six large Canadian markets examined by Demographia found that 3 fell into the ‘moderately unaffordable’ category while the other 3 were classified as ‘severely unaffordable’.
Collectively, the largest markets in Canada register as ‘seriously unaffordable’ with a median multiple of 4.6
While well below the lofty heights of Australia and China, our current affordability rating is certainly worrisome. For a historical perspective, let’s look back at the second annual Demographia survey from 2006. It used data from 2005 when the US market was peaking and about to begin its decline. Note two things: The erosion in affordability in large Canadian centres since that time and the peak median multiple of the US bubble.
Interesting. I know some would suggest that our housing market is not subject to the same laws of gravity that govern the markets south of the border, but it is concerning that income levels are not pacing house price appreciation in the larger centres….as was the American experience. Rising real estate prices relative to incomes can be sustained in the short term provided that interest rates are falling and/or lending criteria are being loosened.
Here in Canada, interest rates cannot move meaningfully lower, but they certainly have a lot of dead air above them. Although I foresee low interest rates for the next few years, the fact remains that there is not much stimulative potential remaining from falling or stable interest rates. When it comes to lending standards, we now have a clear message from the government that it intends to tighten them up. That implies a probability that house prices will either stagnate while incomes catch up or more likely will move rapidly back in line with fundamentals via a price correction.
Note also that Ireland peaked around a mean multiple of 6. Actually that is a bit misleading since it only represents one city: Dublin. The rest of the country was less overvalued, but we know how their story played out. Back in November I examined the lessons that can be learned from the Irish experience. It may be worth reading again to remind us of the dangers of any credit bubble driven by a rapid and unsustainable rise in real estate values.
The broader Canadian market much less overvalued
When the 35 largest markets in Canada were analyzed, the result was much less worrisome. The 35 largest markets in Canada gave a median multiple reading of 3.4, or moderately unaffordable. This certainly suggests that the most significant overvaluation in Canadian real estate lies in the larger centres.
Of the smaller markets examined, the bulk of the severely unaffordable markets were in British Columbia: Victoria (7.1), Abbotsford (6.5) and Kelowna (5.9).
Consumer debt levels as the great equalizer
While real estate prices are not as lofty as some other countries, the data masks a more concerning trend. In a report earlier this year, the Certified General Accountants Association of Canada confirmed that Canadian debt levels were the highest of the 20 OECD nations when compared to assets. When compared to incomes, Canada’s consumer debt level still well exceeds the levels of the other OECD nations examined in the Demographia survey.
This puts a limit on the potential future expansion of the median multiple reading as it adds to the total debt service ratio of the average consumer. Personal line of credit growth in Canada has grown far faster than any other form of debt.
What would make for an interesting additional section on the Demographia report would be the potential ability of residents in each nation to amass more mortgage debt given total consumer debt and interest rates. Consider a country with a median multiple of 6, but whose consumers carry little or no non-mortgage debt and where interest rates are relatively high. This country has the ability to see their mean multiple expand either through an expansion in debt levels or a reduction in interest rates.
Another country that has a mean multiple of…..say…..off the top of my head……4.6, but whose consumers are carrying record debt levels relative to income and whose interest rates are near historic lows has much more limited upside potential to their median multiple.
The bottom line is that this survey is largely in line with my general thesis that the broad Canadian housing market is overvalued. The correction will be centred in larger cities, but due to the fact that we have a significant credit bubble that I believe is widespread in nature, a decline in real estate prices will have a strong negative feedback effect on the broader economy, affecting all Canadians regardless of where you live.