This article was released on April 22, 2016. Find our latest international equities insights here.
Each year in the March quarter we like to review the annual housing affordability analysis prepared by Demographia. Their 12th edition takes into account median house prices relative to gross median household income in the 3rd quarter of 2015 and covers 367 metropolitan markets in nine countries. Eighty-seven of these metropolitan markets have a population of more than 1 million.
The results for the most expensive markets with populations of more than 1 million are summarised below.
In terms of rankings not a lot has changed since 2014, but what is very noticeable is that Hong Kong, Sydney, Auckland and Melbourne have become significantly more expensive. No great surprise there we suppose. Vancouver has now slipped to third place behind Sydney – but is still at a supremely expensive multiple of 10.8 times gross median household income (10.6 in Q3 2014).
Demographia classify any multiple of 3.0 and under as “affordable”; 3.1 to 4.0 “moderately unaffordable”; 4.1 to 5.0 “seriously unaffordable” and 5.1 and over as “severely unaffordable”. All of the cities in the above table are therefore in the latter category.
The authors of the analysis comment that… “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 from 2.0 to 3.0 times median household incomes. However, in recent decades, house prices have been decoupled from this relationship in a number of markets … (and) without exception these markets have severe land use restrictions … that have been associated with higher land prices and in consequence higher house prices … In virtually all of these markets there are severe restrictions or even prohibitions on new housing development on and beyond the urban fringe”.
In a withering introduction to the 12th Demographia survey, Australian Senator Bob Day comments…“It is important to remember that the scarcity that drove up land prices is wholly contrived – it is a matter of political choice, not geographic reality. It is the product of restrictions imposed through planning and zoning.” He goes further: “Quite apart from the economic foolishness of it all, it is morally wrong for legislators to be enriching some (established home owners) while impoverishing others (first home buyers)…In creating the conditions for home ownership to become the privilege of the few rather than the rightful expectation of the many, governments have produced intergenerational inequity and breached the moral contract between generations.”
Senator Day also rails about the “misallocation of resources resulting from the supply/demand imbalance that is enormous by any measure and affects every other area of a country’s economy.” Quite.
We have always wondered about the singular focus of many western governments on home ownership. As soon as we slumped into the financial crisis in 2008 what did several governments do? – provided financial incentives to enable more people to purchase overpriced homes. Votes are more important than economic common-sense.
When your ageing correspondent and his wife purchased their first house (1973, Melbourne) – it cost precisely 1.8 times our gross household income – and trust me when I say that that income was not “fancy”. But that was normal for the time and all colleagues and acquaintances were doing much the same thing. It is impossible now. So you see, something is seriously wrong. The vested interests (existing home owners) have to be tackled by courageous governments, honest in their intent to eliminate the alarming and growing intergenerational inequity referred to by Senator Day. Is that a pie we spy in the sky?
If something is foolish we expect at some time that foolishness to end. We don’t know when crazy house prices will start to moderate relative to income but we are certain that they will. We hope we live long enough to see it.
Work by the Organisation for Economic Co-operation and Development (OECD) supports the analysis by Demographia. The data in the table below relates to 2013, so it is a couple of years old but the thesis relating to extremely expensive housing in Australia, Canada, New Zealand, etc. is well backed-up by this evidence.
So what is cheap? Demographia comment that the most affordable (subtly different from “cheap”) major markets in 2015 were in the United States, which had a moderately unaffordable rating of 3.7, followed by Japan with a median multiple of 3.9. In the US the five most affordable major cities (over 1 million populations) were Buffalo, Cincinnati, Cleveland, Rochester and Pittsburgh (all with multiples between 2.6 and 2.7).