(Most of) Canada Tops International Housing Affordability

Some city planners say extending the boundaries of sprawling cities is like loosening your belt a notch to deal with obesity. It is a cute saying, but the release of the fourth edition of an international housing affordability survey reinforces the growing view that it also tells us a lot about whether we will be able to afford a house. Canada has the most affordable housing in the English-speaking world, but there is no room for complacency.

The Demographia International Housing Affordability Survey compares the affordability of housing in 227 large cities in Australia, Canada, Ireland, New Zealand, The United Kingdom and The United States. Affordability is measured using the median multiple, which expresses the median house price as a multiple of the median household income. For example, in Thunder Bay the median household income is $58,500 and the median house price is $107,800, which gives a median multiple of 1.8.

Thunder Bay has the most affordable housing of the 29 Canadian cities on this list. On the other hand, the figures for Kelowna are $446,300 for the median house, while the median household income is $52,200, for a median multiple of 8.5.

Canadian houses are the cheapest of the six countries, with a national median of 3.1 compared to 6.3 in New Zealand and Australia. Prices are rising in more markets than they are falling, but it is the differences across Canada that are most interesting.

And they are dramatic. A Kelowna homebuyer pays off the equivalent of a house in Thunder Bay and then does it again almost four more times. Worse, these house prices actually understate the true cost differences because houses that are more expensive mean larger loans and higher interest rates. This year, the Demographia links to a mortgage calculator that takes these real differences into account (see related link below).

How did these differences come about, and how much do they matter?

Such wide gaps are a recent development in the history of home ownership. From the post-war boom to the 1980s, median multiples of between 2-4 years median income were the norm. It is only in the last decade that some markets have dramatically increased in price, which gives us a clue as to the reason. It is a localized phenomenon, not a nationwide one. It is not an issue of income because the median multiple is calculated with income as the base. It could be that some places are just nicer to live, so people are prepared to pay more for houses there. However, it seems unlikely that a homebuyer values living in Victoria (median multiple 7.3) more than twice as much as living in Halifax (3.1).

It is not a matter of fast-growing cities having problems keeping up with demand. Analyzing affordability by relative demand shows no relationship between demand and housing affordability. The fastest-growing city of more than 5,000,000 in the high-income world, Atlanta, has superior housing affordability.

This is where the belt-tightening analogy ties in. With all the previous explanations falling flat, the one thing that unaffordable markets have in common is the attitude among local city planners that city growth, like obesity, is a bad thing. When city planners impose city growth boundaries or metropolitan urban limits and other constraints on developing more land for housing, residents are left to bid up the prices of existing houses until they reach the same price as building on one of the rare available lots. Therefore, regarding new development like an unhealthy disease imposes huge costs on communities.

As house prices relative to income increase by double or more, communities are badly affected. Investing an extra $100,000 in a house purely because land constraints have inflated prices does nothing for the economy compared to investing or spending to create jobs and wealth. Squeezing people out of owning a physical stake in the community is a form of social exclusion that often hits the most at-risk members of the community hardest. Worse, it creates political tension between the haves, who would like to see housing stay expensive, and the have-nots, who would like to be able to buy a more affordable house.

Canada, for the most part, is in a choice international position when it comes to housing, but this should not be taken for granted; however, some areas need to take action against severely unaffordable housing. A consensus is emerging that, as former Reserve Bank of New Zealand governor-general Donald Brash wrote in the survey’s introduction, “The affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.”

Canada’s opportunity is to make housing affordability the number one city planning priority before we find ourselves in the same difficulty as others.