Do you think real estate in Toronto or Vancouver is too expensive? Then consider cheaper places like Los Angeles, New York or San Francisco. Oxford Economics has published its North American Housing Affordability Index (HAI) for the second quarter of 2021. The global forecasting firm found that affordability has deteriorated across North America. Toronto and Vancouver real estate, however, were in a league of their own. The cities are now less affordable than traditional expensive global power cities like Los Angeles and New York.
The housing affordability index
The HAI measures the cost of carrying a home versus the borrowing capacity of a median household. It uses a points system where higher numbers are less affordable and 1.0 means full budget. An index of 1.0 means that a house costs the maximum budget an average household can afford. At 0.75, the household’s maximum budget is 25% higher. Likewise, an index of 1.25 means that a median household needs 25% more than it earns to be able to afford a home. Each city’s score is based on regional income.
At first glance, a value of 1.0 may seem ideal. However, the more a household spends on housing, the less it has to spend on other areas of the economy. This leads to slower economic growth at the expense of real estate. If a region isn’t a luxury region like Monaco, it might be difficult to keep younger people. Not a problem for affluent regions with a well-managed tax base. A huge problem for regions that depend on younger people to support the tax base.
Housing affordability fell across North America
In general, housing affordability declined in English-speaking North America. In the US, the index rose to 0.77 in the second quarter of 2021, up 3 basis points (bps) from the previous quarter. In other words, housing costs were 23% below the maximum local income. An obvious culprit here is house prices, which are rising much faster than incomes. Less obvious is the mortgage cost, which rises again to higher and more natural interest rates.
The affordability of Canadian real estate deteriorated much faster and started in a worse place. Canada’s index hit 1.35 in the second quarter of 2021, up 5 basis points from the previous quarter. Housing costs are 35% higher than a typical household can afford and are expected to continue to rise. Not because of rising property prices, which the company believes will soon plateau. Affordability is likely to deteriorate as rates normalize from the stimulus-driven levels. However, rising rates also tend to push prices down, so we’ll see how that plays out.
Vancouver real estate is the cheapest in North America
Vancouver is once again the king of priceless real estate in North America. The index for the city reached 1.71 in the second quarter of 2021, up 3.4 basis points from the previous quarter. An average household needs 71% more income than it brings in to support a house at these prices. The company expects mortgage rates to rise, adding another 6 basis points to the index by the end of next year. Good for Vancouver. It took victory after losing top spot in the UBS Global Bubble Index.
Toronto Real Estate is the third cheapest city
Toronto property came third – cheaper than Vancouver but less than New York City. The city’s index hit 1.56 in the second quarter of 2021, up 3 basis points from the previous quarter. The analysts expect the index to rise by a further 9.6 basis points by the end of next year. The average household needs 56% more income than it earns, and that will be 65.5% in the next year.
Toronto recently claimed the place of the second largest bubble in the world. A real achievement when you consider that 5 years ago it wasn’t considered a bubble city. That’s an exuberant spike in home prices.
Los Angeles real estate is the eighth worst market for affordability
Los Angeles real estate ranked 8th, which looked like a deal unlike Vancouver. The city fell to 1.45 in the second quarter of 2021, up 2.7 basis points from the previous quarter. It is forecast to rise another 4.7 basis points by the end of next year, still more affordable than Toronto today.
Ottawa Real Estate is the ninth worst market for affordability
Canada has managed to capture yet another dwindling affordable real estate market – Ottawa. The index hit 1.39 in the second quarter of 2021, up 2.1 basis points from the previous quarter. The company is already 39% more expensive than the average family can afford and expects a whopping 17.2 basis points increase by next year. That would bring Ottawa to Toronto’s affordable levels today. Canadian politicians are going to do something, they just have to check the price of their house first.
Montreal Real Estate is affordable for Miami, NYC, and Seattle alike
Montreal real estate used to be known as a place with cheap housing – but you might as well move to NYC now. Montreal, Miami and New York City (NYC) ranked 1.04 on the index in the second quarter of 2021. Seattle, which is in a notorious housing crisis, was just a hair higher at 1.07. Montreal is forecast to be more expensive than NYC on a relative basis by next year. That makes sense since Greater NYC’s GDP is as big as all of Canada’s GDP, but Montreal has better bagels. Checkmate.
Real estate prices in North America are rising rapidly, and no matter where, prices are skyrocketing. Boise real estate is now the second least affordable market in North America, if you can believe it. This is by no means the result of fundamentals, but an intended consequence of political decisions.
There is no other way to read the flood of mortgage liquidity at a time when home sales were at record highs. The resulting inflation is now seeping through to other areas of the economy. This will drive interest rates soaring whether the economies are ready or not. If rising interest rates don’t trigger a correction, affordability deteriorates further.
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