Why Housing Affordability Matters

Home ownership has been an important driver in the democratization of prosperity that has occured in the high-income world. In many nation's home equity accounts for most of the wealth of middle income households. Thus, besides its quality of life, neighborhood and social cohesion benefits, home ownership represents an important "pillar" of a sustainable modern economy.

Since 2000, housing affordability has fallen to crises proportions in many of the world's major urban areas. The Demographia "Housing Affordability Ratings and Rankings" is a first attempt to compare housing affordability among international urban areas.

An analysis of historical data indicates that average house price multiples (median existing house sale price divided by median household income) have typically been 3.0 or below. The house price multiple is an indicator not only of housing market affordability, but of the likely trend of home ownership in the future.

Seriousness of the Crisis

The following example illustrates the seriousness of the housing affordability crisis. Home ownership rates in Australia, Canada, New Zealand and the United States are all above 65 percent. At a 3.0 house price multiple, approximately 60 percent of US households could qualify for a mortgage on the median priced home. At the above 8.5 house price multiples now being witnessed in California and Sydney, less than 25 percent of households could quality to purchase such a home.

Rating Affordability

The "Housing Affordability Ratings and Rankings" categorize urban areas into four classifications, using the estimated house price multiple relative to household income (both medians):

Severely Unaffordable: House Price Multiple 5.1 or greater

Seriously Unaffordable: House Price Multiple 4.1 to 5.0

Unaffordable: House Price Multiple: 3.1 to 4.0

Affordable: House Price Multiple 3.0 or less

California & Australian Markets Most Unaffordable

Some of the "Severely Unaffordable" urban areas exhibit house price multiples that may be at all time highs, and well above the 5.1 threshold. For example, the following urban areas have house price multiples above 6.5:

Los Angeles
Orange County (Los Angeles)
San Diego
Sydney
Honolulu
San Francisco
Miami
New York
Melbourne

Among the "Severely Unaffordable" urban areas, 23 of the 26 are subject to strong "urban consolidation" or "smart growth policies," which have the potential to create scarcity in the supply of land for new housing (and thereby increase housing prices).

All Major Australian Markets Severely Unaffordable

All of the Australian markets except for Darwin are rated as "Severely Unaffordable." Moreover, the rate of housing affordability loss in the major Australian markets has been stunning. In the first few years of this decade, the house price multiple has risen 40 percent or more in Adelaide, Brisbane, Perth and Sydney. The two largest New Zealand markets, Auckland and Christchurch are also experiencing severe unaffordability. Each of these markets in Australia and New Zealand are subject to strong "urban consolidation" or "smart growth" policies.

Fast Growing Dallas, Houston & Atlanta: Affordable

Among the "Affordable" urban areas are three of the four fastest growing urban areas with more than 3,000,000 population in the high-income world, Atlanta, Dallas-Fort Worth and Houston (Singapore, the second fastest growing urban area, is not on the list).

None of the "Affordable" urban areas has adopted "urban consolidation' or "smart growth" policies, with a relatively plentiful supply of land apparently assisting in keeping housing prices down.

Methods and Evolution

This first issue is limited to urban areas in Australia, Canada, New Zealand and the United States, simply because data for these countries is readily available. Future editions will include urban areas from other high-income world nations as additional data is identified. The median household income data is generally estimated using a Census generated based and adjusted by the best available indicator of income growth. As a result this measure must be considered to be an estimate. Therefore caution should be used in comparing urban areas with similar house price multiples. Generally, if two multiples are within 5 percent of one another, they should be considered the same (for example, a 4.0 house price multiple should be assumed to be approximately equal to a range of from 3.8 to 4.2).

Demographia would be in interested in any additional information on data sources and comments on this product and the methodology. Contact Us