After a year of unprecedented turbulence in world housing markets, the Frontier Centre for Public Policy has released a survey comparing the price of housing to incomes in 265 cities worldwide, including 34 from Canada. The 5th annual Demographia International Housing Affordability Survey is authored by New Zealand’s Hugh Pavletich and the USA’s Wendell Cox. This year’s survey is prefaced by New York University’s Dr. Shlomo Angel. The survey observes dramatic trends in US markets that point to future Canadian trends.
Recent upheavals in housing markets across the globe mean that this fifth annual survey shows the largest year on year changes since the survey began. At the same time, regional variations amongst these unprecedented changes have reinforced a theme present in the previous four surveys:
“Most factors, such as more liberal mortgage qualifications, and lower interest rates applied virtually equally throughout each nation and thus cannot explain the vastly different cost experiences that have occurred between markets. There is, however, one factor that varies substantially between markets, at least in the United States and Canada — the nature of land use regulation.”
This year’s changes have amplified the regional nature of housing affordability trends. “Financial crisis” losses, which began in the US mortgage market and have resonated through global markets, have been distinctly heavier some markets than in others. For example the highly supply constrained market of California has seen particularly heavy losses. There are clearly local factors at play in housing affordability and, increasingly, academic evidence points to land use regulation by local government as the defining factor in housing affordability.
The extent to which local authorities make land and development possibilities open to developers and would be home buyers affects the affordability of housing more than any other factor. The most basic economic analysis is crystal clear that constraints in supply lead to increased prices.
In light of the current world financial situation, land supply constraints, high prices, and high volatility are a significant piece of the puzzle in explaining financial collapse. Higher prices for houses, while often welcomed by existing home owners, are an affordability obstacle to non home owners and ultimately increase volatility in housing markets because high prices have further to fall when economic conditions change. When those prices are created by artificial supply constraints on urban land, such as “Smart Growth” policies adopted by many Canadian municipalities, this volatility is unnecessary and dangerous.
As Dr. Angel points out, questionable city planning policies have contributed to low supply and high prices: “Cities grow and expand. As their population increases, their areas increase even faster… In light of these findings, the current efforts to contain the pace of the outward expansion of cities for one reason or another are, at the very least, open to serious question.”
Canada has had a milder experience than that of the USA over the past year, however underlying trends point to Canadian housing markets being equally vulnerable to changes in economic conditions. Due to declines in US values, British Columbian markets have moved to being the most unaffordable in the world. Vancouver is ranked as the fourth most unaffordable market out of 265, at a ratio of 8.4 years’ income to the price of one house. Victoria, Kelowna, and Abbotsford are also rated as “Severely unaffordable,” with more than five years’ income required to buy a house.
Canadian cities which have experienced strong economic growth have found their affordability slipping rapidly. Regina, which was the most affordable market in the world two years ago, is now ranked No. 121. Major Canadian housing markets Calgary, Toronto, and Montreal are all between 4.6-4.8 years’ income required to buy a house. Compared to the traditional ratio of 2-3 years income per house price, these markets are all less affordable than they ought to be.
Canada has so far escaped the bubble-and-bust trend seen in the United States in recent years. However, the ratios of price to income seen in major Canadian markets and the affordability trends observed when Canadian housing markets experience rapid economic growth suggest that artificial supply constraints applied on this side of the border are setting the Canadian mortgage industry up for a similar fall.
For more information, contact:
Senior Policy Analyst
Director, Saskatchewan Office and Senior Policy Analyst