Every year since I started this blog, I have posted an analysis of Demographia's international viewpoint on the affordability of real estate in several of the world's developed economies. I have already posted on the decreasing affordability of some residential real estate markets in the United States and, in this posting, I want to take a look at the affordability of real estate in Canada's largest markets, particularly those in the Greater Toronto and Vancouver regions.
Demographia uses a unique measure to determine the affordability of residential real estate; the median multiple. This measure combines both median house prices and median household incomes in a given market to ascertain the affordability. This is a far better method of defining the affordability of housing than simply looking at price trends which really tell us nothing about whether or not a family unit can afford to buy and sustain mortgage payments.
Here is how Demographia calculates the median multiple:
Median Multiple = Median Price of a Home in a Market
Median Household Income in that Market
Here is how Demographia defines housing affordability using the median multiple:
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 5.1 or more - Severely Unaffordable
Historically speaking, housing markets have been considered to be affordable when the median multiple ranges between 2.0 and 3.0.
The 2017 edition of Demographia's International Housing Affordability Survey looks at affordability in 406 markets in nine nations and found this:
As a whole, when considering all 40 of Canada's housing markets, the median multiple averages 3.9; only 10 or 25 percent of the total are considered affordable with 13 being moderately unaffordable, 10 being seriously unaffordable and 7 being considered severely unaffordable making up the remaining 75 percent. Canada does have one distinction; it has the third least affordable housing market among all 406 markets; Vancouver with its median multiple of 11.8 falls behind Sydney, Australia at 12.2 and Hong Kong at 18.1.
Here is a graphic showing how most of Canada's major housing markets (population greater than 1,000,000) have become increasingly unaffordable since 2004:
Not surprisingly, all major markets, excluding Ottawa, are considered unaffordable to varying degrees with Toronto and Vancouver standing out from the rest. In the case of Vancouver, its median multiple has more than doubled since 2004 from 5.4 to 11.8.
Let's look at some details. Here is a table which shows the ten most affordable real estate markets in Canada when measured in terms of household income:
As you can see, in Canada's most affordable housing markets, affordability has changed very little between 2016 and 2017.
Now, let's look at a table which shows the ten least affordable real estate markets in Canada when measured in terms of household income:
You can readily see that Canada's least affordable housing markets have become even less affordable over the past year, particularly Vancouver, Victoria and Toronto. Let's look at the example of Vancouver. Over the past year, median household income in Vancouver rose by a whopping 1.1 percent whereas the price of a median house rose by 9.8 percent. In the case of Toronto, median household income rose by a tepid 1.3 percent whereas the price of a median house rose by 16.2 percent. Obviously, this is not a sustainable scenario, particularly if mortgage rates rise.
As was the case in the United States just prior to the Great Recession, housing markets can correct unexpectedly when it becomes too expensive for a household to sustain its housing lifestyle. The current levels of median multiples in Canada's largest markets strongly suggests that the valuations in the residential real estate market are unsustainable and will eventually be subjected to correction.