Demographia Housing Affordability Survey released

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’.

Vancouver-  9.5

Montreal- 5.2

Toronto- 5.1

Calgary- 4.0

Ottawa-Gatineau- 3.6

Edmonton- 3.5

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… 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.



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23 Responses to Demographia Housing Affordability Survey released

  1. Brian says:

    Ben, when you say “larger cities” does that include the suburbs of these cities?
    Let’s take Toronto for example, are we to assume Oakville, Burlington, etc are all overvalued significantly too?

    • Good question. The report indicates that it used metropolitan markets. I would assume this means all cities that fall in the GTA region were compiled in the data.
      If you’re looking for specific data, get the median sales data for homes in your area (check out your local real estate board) and divide it by the local median income (chamber of commerce should have this data). Voila!

      See where your city falls. I would be pretty surprised if anywhere in the GTA was not at least seriously unaffordable, but I don’t have that data at hand.

  2. Jordan says:

    The Demographia survey has lots of important info, but I’ve always been struck by the introduction. It’s worth a read, if only to see what this organization’s “agenda” is.

  3. Will says:

    The way I see it, it’s not necessarily that home prices are overvalued, it’s that they will plummet when interest rates go up.

  4. Spirit says:

    There are many factors that have driven housing prices up. Low interest rates and CMHC policies are the number one factor in driving prices up in the GTA followed by some other observations. Immigration also helped pick up demand although that is slowing. Immigrants have realized there are no jobs and the word is getting back to there countries.
    In the Toronto area a major factor is people attempting to move near employment.
    The Missisauga area has the airport which attracted many industries from the rest of Toronto. Missisauga and surrounding municipalities grew substantially. These municipalities charge substantial development charges ( franchise fees) which increase the price of a new home. Existing homeowners benefited greatly every time these were increased. Some municipalities have increased them 300% since 2003. The Province in there wisdom have implemented Smart Growth which reduced the size of lots and increased densities. Again this initiative benefited existing homeowners market values tremendously. Builders over the year have had to use cheaper quality products such as plastic woods, stucco instead of brick while trades have had to go to piecework contracting and agency hiring as offsets for higher land prices and higher government costs. Builders are being blamed for taking the cheerio and making the hole bigger while in fact they are just reacting to government policies and government increased costs. The cumulative affect of government regulation has increased builders costs far exceeding inflation and reduced the longterm quality of new housing ( who cares about the long run right). Speculation ( called investors) and white washing ( not a wise buy) have also contributed to the run on price increases. The GTA market is starting to slow down and I suspect it will be a gradual downward spiral. I suspect CMHC foreclosure rates will be picking up quite vigorously in the future. Too many people took on too much debt. Greed and envy runs rampant in our society. Unfortunately a case could be made that owning was a better investment than renting. Plus renters are looked down upon ( of course by homeowners). No one factor but most of the increases have been caused by Provincial government policies at the expense of the young new home buyers. Hopefully over time people will come to realize it is the housing market and not the stock market.

  5. Spirit says:

    Ben: I just noticed the following warning on distributing CMHC stats. Be careful Big Brother may be watching.

    Other than as outlined above, the content of the publication cannot be reproduced or transmitted to any person or, if acquired by an organization, to users outside the organization. Placing the publication, in whole or part, on a website accessible to the
    public or on any website accessible to persons not directly employed by the organization is not permitted. To use the content of any CMHC Market Analysis publication for any purpose other than the general reference purposes set out above
    or to request permission to reproduce large portions of, or entire CMHC Market Analysis publications, please contact: the Canadian Housing Information Centre (CHIC) at; 613-748-2367 or 1-800-668-2642.
    For permission, please provide CHIC with the following information:
    Publication’s name, year and date of issue.

  6. buff_butler says:

    My one concern with this report is that there is no benchmark price. Ie say for example use 2004 prices of cities; so that relative prices can be derived. For this reason I think this report is understating the risk in some cities and over stating in others.

    However like Jordan said there is a clear agenda; however it has some merit. I seem to remember CR posting an article showing that the cities with “Smart Growth” were among the most volatile once demand dried up. This relation wasn’t absolute but definitely had effect.

    • Why would it need a benchmark price if it is comparing the change in the price/income ratio (median multiple) over time?

    • jesse says:

      The Demographia survey’s intent is to demonstrate that cities with restrictive land use policies are severely unaffordable. They’re right.

      The survey does not account that residents of a certain city are willing to pay a premium because the city is more desirable to live in. That is, a desirable city like Melbourne, San Francisco, or Vancouver will always have high price-income ratios than other cities because of the lifestyle choices they offer. I think concentrating on price-rent ratios is the key: investors don’t really care about a city’s desirability, only that they get a certain return on their investment. The real key is to look at price ratio fluctuations, not their absolute value.

      The Demographia survey authors are arguing is that there are examples of cities where relaxed and decentralized land use policies have been successfully used to reduce the impact of bubbles by being faster to react to increased demand. That’s their agenda and I don’t think there is much else going under the surface. Examples of successes in their suggested policies exist not just in certain laissez-faire cities of Texas or blighted rust belt cities of Michigan and Ohio, but also in the relatively socialist enclaves of Germany. I have conversed with one of the co-authors and he comes across as genuinely striving for policy changes to prevent housing bubbles, not anti-government deregulation as it may come across in the survey’s arguments.

    • buff_butler says:

      Sorry I wasn’t very clear. I was referring to having a benchmark price/income ratio. I couldn’t find any relation over time except one about Australia. Say for example certain cities would normally be at a 2 in 2003 however are now at a 4. I think the relative change in affordability would be a better story rather then just absolute un-affordability at one point in time.

  7. QH says:

    Ben, one section of your article is titled “the broader Canadian market much less overvalued.” Are unaffordability and overvaluation one and the same, or is it possible that an asset is correctly priced, but workers are underpaid? Just a question regarding terminology, and I don’t know the answer.

    • Hi QH

      Unaffordability and overvaluation are certainly closely tied together. It’s hard to argue that asset prices are reasonable if those assets rely heavily on income gains to support their increase and the income gains don’t line up. As I’ve said before, falling interest rates and a loosening of lending standards can mask the trend, but it’s not sustainable.

  8. Dmitri says:

    Demographia views land zoning laws as the main driver of prices. Which is myopic. Unchecked land use will create more problems than it solves.

    Interesting solution would be is to increase taxes inversely proportional to the land utilization and the desirability of the zone (also decrease taxes based on the amount of family friendly units in the building or other desirable attributes).

    So for example a low density house in the middle of Toronto would attract the highest tax, while a high rise condo with 60% family units would attract the lowest. This would quickly correct problems with house prices and lack of efficient land use (which is frankly long overdue).

    • jesse says:

      “Unchecked land use will create more problems than it solves. “

      At first glance I thought so too. However look a bit closer at what they’re recommending. They are stating that specific areas of a region can impose whatever restrictions they like, however the undeveloped regions (if there are any!) should have no restrictions on building, nor should areas who want to rapidly expand be hindered by an overarching land authority (such as the agricultural land reserve in BC or similar tightly-controlled land use boards in Australia). There is also consideration that if a particular area expands, the developer pays for the utility hookups and in some cases the transportation infrastructure, schools, and other public services. It should not be a model immediately discounted in my view, without at least seriously analyzing it.

      There are excellent examples of the author’s proposed model in places like Germany, hardly what one associates with an unrestricted land use regime. (Germany also has rental and property investment controls that help prevent bubbles from forming.)

      I’m not necessarily defending their thesis; I do think it deserves more consideration than what it seems to receive from politicians who arguably are addicted to revenue wrought from controlling a region’s land use.

  9. The general says:

    Most urban centers will feel the pressures of being to much in debt on an individual basis. After being pressured by business people in the housing markets and finance companies and banks to take advantage of the low interest rates, people have taken on these debts without the proper support given to these people. Were all these people told that the economy is falsely inflated with money borrowed by our federal government and that there is will be a large correction ( another word for a market crash ) in all aspects of our economy including our housing market.

    Smaller cities will feel it more because there will less margin to buy and sell. The larger cities will notice it more because of the mass number of people in the same boat, and the media will sensationalize it like they normally do because of the news value.

  10. BuBu says:

    I don’t think this report is accurate. Edmonton median price is not $288k… maybe if you count also the condos, but I don’t think we should do that as long as you can rent for way cheaper the same condo you buy for over $200k… When we consider the under 3 times salary prices we should look at houses not 1 bedroom condos.. my 2c…..

  11. Brett says:

    Definetly not accurate data for Regina. Had a respectible realtor pull the data for Q3 median price. Demographia had it recorded as 213k, but the actual median for Q3 was 260k. This bring the rating from 3.1 to 3.8.

  12. Will says:

    Condo’s should definitely be part of median price when compared to median income. It’s a place for folks to live, isn’t it?

  13. Pingback: Credit risk across the nation: Who’s most at risk from an interest rate shock? | Financial Insights

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