There’s a headline for you, although it could be worse than some expected, and not nearly as dire as the expectations of others.
A company called Point2Homes recently did a study on the affordability of the fifty largest North American cities, using a metric that I don’t believe we’ve talked much about on Toronto Realty Blog, and that’s the “median multiple.”
This post is a good follow-up to the “UBS Global Real Estate Bubble Index” from last week, since it’s a different way of looking at various markets, and provides a very different result…
As you can imagine, I get a lot of solicitations each and every day, both from Toronto Realty Blog, but also just from nature of transacting in real estate.
Last week, I literally hung up my office phone after saying, “thanks, but no thanks” to an “SEO Specialist,” only to have the phone ring about twenty seconds later, and hear the voice on the other end say, “I’m Cooper, and I can change the face of your Instagram for a nominal cost!”
When it comes to TRB, I get 2-3 solicitations daily from people wanting me to post their material, offering to write posts, or even sponsor posts.
A developer once offered me five-figures to put a banner ad on the top of TRB, for, get this – a pre-construction condo. Oh, how well they know me…
I’m amazed at the offers I get.
Some of them are automated, but most solicitations are direct, from people offering their writings for free, except their writings are things like, “Ten Tips For Better Tulips,” or “Top-Selling Condos In Mesa, Arizona.”
I suppose this is the cost of doing business, and sorting through them is as repetitive as it is frustrating.
But once in a while, something comes through my inbox that’s worth looking at, and as somebody who strives to provide original content on a bi-daily basis, I have a tremendous amount of respect for people, or companies, who can produce innovative and investigative pieces on real estate.
The other day, I received an email from somebody in public relations at Point2Homes, which is an international real estate search portal, and like just about every company out there that has anything to do with real estate, they’re trying to drum up content that people want to talk about.
They recently released the following: “Housing Affordability: How Fast Could You Pay off Your Home in the 50 Most Populous Cities in North America?”
And while I’m not concerned with the idea of “how quickly you can pay off your home,” (I’ll explain why after we read the article), I was absolutely enamoured with the study.
So I’m taking them up on the offer to reproduce the article.
Let’s have a look, then discuss.
Say you could put your entire income into paying off your house. That would make things quicker, right? To find out exactly how fast that might be, our researchers brought together data on home prices and annual incomes to determine housing affordability in the 50 most populous cities in Canada, the U.S. and Mexico. To measure affordability, we calculated the affordability ratio, also known as the median multiple, which is the median home sale price divided by the median annual family income (all amounts are expressed in U.S. dollars). Essentially, the higher this ratio is, the more time it takes to pay off your house, and the wider the affordability gap in the housing market.
Our study found that Vancouver is North America’s most unaffordable real estate market. With its insane affordability gap, Vancouver exceeds even notoriously inaccessible Manhattan, and all other North American markets. In fact, 32 out of the 50 locations we analyzed are considered seriously and severely unaffordable.
According to The International Housing Affordability Survey, here’s how housing affordability is rated:
Overview: Owning a Home in Vancouver is Less Affordable Than in Manhattan and San Francisco
With a median home sale price of $1,108,345 and a median family income of $63,944, Vancouver is the most unaffordable market in North America, more so than other expensive housing markets such as Manhattan and San Francisco. Its median multiple currently stands at 17.3. Although homes in San Francisco and Manhattan are more expensive than those in Vancouver, with median selling prices of $1,275,000 and $1,207,500, respectively, a lower median income is what makes Vancouver’s affordability index higher than that of the two U.S. cities.
According to The New York Times the affordability crisis was fueled by foreign investments in the real estate sector. The median home sale price has escalated way above the median family income, turning Vancouver into one of the least affordable housing markets in the world.
This has put home ownership out of reach for many first-time buyers, pushing them out of the local market. To make matters worse, even many well-paid local professionals are finding it increasingly difficult to afford housing in their communities.
This worrisome trend isn’t isolated to Vancouver only. House prices in big cities that attract young professionals have risen way above what people could afford on a median income and Manhattan is no exception. While the median family income in Manhattan ($77,559) is considerably higher than the U.S. median ($56,516), it still can’t keep up with the current market asking price of $1,207,500, which is more than 4 times the median U.S. home sale price ($258,300). This has led to a severely unaffordable median multiple of 15.6, securing Manhattan’s position as the second most unaffordable housing market in North America.
The third most expensive market on our list, San Francisco boasts the highest median income in the U.S. ($92,094), almost twice as much as the national median. But even though San Francisco residents earn the most, it would still take 13.8 years’ worth of the median wage to pay off the mortgage in this overheated housing market, given that the median home price here is $1,275,000 – the most expensive selling price in North America and quadruple the national median price.
The annual median family income in Canada is $64,752, slightly above the American benchmark of $56,516. However, a Canadian home sells for the median price of $485,680 – almost twice as much as the median sale price in the United States, currently standing at $258,300.
With a median multiple of 7.5, Canada leads the way as the most unaffordable housing market in North America. And while the median multiple in the United States is 4.6, considerably lower than that in Canada, according to The International Housing Affordability Survey, the U.S. market still qualifies as seriously unaffordable.
A Mexican home might only cost $41,748, but at the same time the average income of $12,806 is 4.4 times less than that in the U.S. and 5 times less than that in Canada. This makes the median multiple in Mexico 3.3, which is considered moderately unaffordable.
Vancouver Is in a League of Its Own
In terms of home values, Vancouver boasts the highest median selling price in Canada. In fact, luxury has become the norm in this Canadian city, where 76% of homes fall in the $1-million-plus category. By comparison, Toronto is the second most unaffordable market in Canada with a median home sale price of $471,600 and a median income of $62,624. This means Toronto’s affordability ratio is 7.5, considerably less than Vancouver’s 17.3. To put it simply, it would take you 10 years longer to pay off a house in Vancouver than it would in Toronto.
Calgary, Ottawa & Edmonton Are Canada’s More Affordable Options
With salaries way above the Vancouver and the Toronto benchmarks and enviable home sale prices, Calgary,Ottawa and Edmonton are the most balanced Canadian housing markets. The median income is $81,496 in Edmonton and $83,256 in Ottawa. With equally advantageous home sale prices, $287,960 and $291,120, respectively, these two cities have the second lowest affordability index in Canada, 3.5.
Calgary comes close to Ottawa and Edmonton in terms of median income. But with a slightly higher median home sale price, $340,000 USD, the median multiple rises to 4.1.
THE UNITED STATES
New York and San Francisco Set the Unaffordability Bar in the U.S.
Manhattan is the most unaffordable U.S. market overall, with a median multiple of 15.6 – more than twice that of neighbouring borough the Bronx (6.7). However, California stands out for having four cities in the top 10: San Francisco (13.8), Los Angeles (12.1), San Jose (9.0) and San Diego (8.3).
San Francisco boasts the highest median income in the U.S., $92,094, but its housing market remains one of the least affordable due to its inflated home prices. It would take 13.8 years to pay off a house in San Francisco.
With a housing affordability index of 12.1, Los Angeles ranks as the fifth most unaffordable market in the United States. While the median home sale price has been on the increase, currently standing at $628,750, the median income is only $52,024.
Brooklyn is New York’s Burgeoning Housing Market
Once a moderately-priced borough, Brooklyn now has a median selling price of $725,000, considerably less compared to the likes of San Francisco and Manhattan, but almost three times as much as the national median. And with the median household income just shy of the U.S. benchmark, Brooklyn’s severely unaffordable median multiple of 13.1 secures its position among the top 5 most unaffordable U.S. markets. As a whole, New York City sports a median multiple of 12.1.
Seattle Gives San Francisco a Run for Its Money
Ranking eighth in the U.S., Seattle also has a severely unaffordable median multiple of 8.7. But if we take into account that in terms of median income Seattle is only steps behind San Francisco, and the median home price hovers around $700,000, this attractive tech-hub is the real winner in terms of housing affordability.
North America’s Most Affordable Housing Markets
With a median multiple of 3.4, Winnipeg stands out as the cheapest Canadian real estate market. While the median income might not deviate too much from the national benchmark, Winnipeg homes have the lowest median selling price of any major city in Canada, $225,254 USD.
With a median multiple of only 1.8, Detroit ranks as the most affordable market in North America. Sure, this might sound good in theory, but it might not be enough to bring back any potential home-buyers. In Detroit, you might be looking at the lowest home values in the U.S., at around $48,000, but it also ranks worst in terms of median family.
Check out the article here:
There’s a few other tools on the site you can play around with to sort the data, but I think what you’ve seen above is the meat and potatoes.
So my very first question is this: should we be using “Median Multiple” as a measure of housing affordability?
There are a lot of ways to quantify the market, and as we saw with the UBS Bubble Index, they were primarily concerned with past appreciation.
Point2Homes is linking income to housing prices, which, of course, seems like a no-brainer.
What I said at the beginning – about not really being interested in how long it takes to pay off one’s mortgage – this is because, quite simply, people don’t pay off their mortgages. Very few people take a 25-year amortization and set their stopwatch. Most people move up the chain, throughout the life cycle, always having some level of mortgage debt.
I don’t think the story here is “how many years would it take to pay off your mortgage,” since very few buyers look at the purchase that way. The buyer of an entry-level condo doesn’t care if it takes 17 years to pay off his or her condo, since a house will come calling in 4 years when he or she gets married, and moves on.
So tell me that’s “yet another measure” of a market, and I’ll say it’s fine. But “the” measure of the market? No.
Not only that, dividing your 2017 family income by your 2017 home purchase price ignores things like the interest rate, amortization period, down payment, risk-free rate of interest and/or opportunity cost, rate of inflation, etc.
What I do like about the idea of home price divided by income is that, as I’ve said, it’s yet another measure of the market.
You might argue that the point is completely lost on Vancouver, since most of the money buying real estate there is in some way, shape, or form, coming from overseas. So what the hell does the median family income matter?
Now methodology aside, what do we make of the Top-5o list, which is actually 54 cities in total?
Well personally, I draw a similar conclusion here as I did with the “UBS Bubble Index” from last week.
In the UBS Bubble Index, 19 of the 20 cities profiled had a “positive” bubble score.
And in the Point2Homes affordability survey only 6 out of 54 cities were deemed “affordable,” and five of those are in Mexico!
Of those five cities, Juarez is apparently one of the deadliest places on earth, nicknamed, “Murder Valley.”
And then there’s Detroit…
So what conclusion can we draw from yet another study that tells us what we already know – that real estate prices are high?
The UBS Bubble Index tells us that 19 out of 20 cities has some level of bubble risk, and the Point2Homes survey tells us that only cities you hear about while watching “Narcos” on Netflix are affordable.
As I said in my blog post last week, is it possible that what exists on paper, doesn’t always exist in practice?
Is it possible that typical and/or historical measures of affordability are no longer relevant in a changing global economic climate?
Or maybe the idea of home ownership is becoming less and less realistic as the world’s population expands, specifically in major cities, like Toronto.
Draw your own conclusions…