Asset Class: International Equities

The most affordable (and unaffordable) housing markets in 2017

At this time of year we like to highlight the work done by the Demographia group who compile valuable housing affordability statistics from several countries. Essentially they extract median income and median house-price data from many major population centers and by dividing one into the other can gain insight into affordability trends over time. The 14th annual survey was recently published utilizing data as at the third quarter of 2017. We reproduce their findings below for the top 21 markets with populations exceeding 2 million.

unaffordable housing graphUnsurprisingly, Hong Kong again tops the leader board with a staggering ratio of 19.4 (up from 18.1 last year). Demographia define any ratio above 5.1 as “severely unaffordable” so it is clear that Hong Kong is in an unaffordable band all on its own. Demographia lack definitive long-term historical Hong Kong data but they do quote from The Chinese University of Hong Kong’s Quality of Life Index which quotes a price-to-income ratio of 4.6 in 2002 but climbing to 15.7 in 2015 (based on a 430 square feet apartment). Research supports the view that Hong Kong’s house prices have been driven higher by restrictive land use regulation.

Sydney’s multiple of 12.9 looks modest in comparison but, in fact, is equally stunning. The multiple has more than doubled since 2001. Urban containment policies are to blame for the remarkable rise in the multiple – not just in Sydney but in all of Australia’s major population centers. In the late 1980s the median multiple was below 3.0 (as it was also in Canada, the U.S., Ireland, New Zealand and the U.K.).

Recent research by Australia’s central bank found that zoning rules cost the average Sydney home buyer almost A$490,000. That’s the premium imposed by government land-use regulations, above and beyond the marginal cost of land. The research suggests that zoning rules account for 73% of the cost of land, pushing the average price of a detached home in Sydney from A$671,000 to A$1.16 million. Interestingly, latest official data suggests that Sydney house prices have started to fall. Add another concern flagged by the central bank – interest-only loans make up about 40% of total loans and gradual conversion to interest plus principal commences later this year. That could put the cat among the pigeons.

In total, Demographia analyze data from 293 markets and find that Ireland and the U.S. have the most affordable housing with a national median multiple of 3.7. Canada is third at 3.9 followed by Japan at 4.1, U.K. at 4.5, Singapore 4.8, New Zealand 5.8 and Australia 6.3 (all national multiples). “Affordable” is defined as 3.0 or less, moderately unaffordable 3.1 to 4.0, seriously unaffordable 4.1 to 5.0 and severely unaffordable 5.1 and over.

The ten most affordable major housing markets (population more than 1 million) are all in the U.S. Rochester is the most affordable with a multiple of 2.5; Cincinnati and Cleveland sit at 2.7, Buffalo, Oklahoma City and Pittsburgh have multiples of 2.8, Detroit and St. Louis 2.9 whilst Grand Rapids and Indianapolis have multiples of 3.0.

So if you want to find housing that is not outrageously priced you know where to go. And if you want to risk your hard-earned dollars in bubble markets you also know where to go.

Pyrford International is registered as an investment adviser with the Securities and Exchange Commission and is a wholly-owned subsidiary of BMO Financial Group.

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