Toronto And Vancouver Real Estate Is Now Much Less Affordable Than LA, New York
Think Toronto or Vancouver real estate is too expensive? Then consider more affordable places like Los Angeles, New York, or San Francisco. Oxford Economics released its North American Housing Affordability Index (HAI) for Q2 2021. The global forecasting firm found affordability has deteriorated across North America. Toronto and Vancouver real estate were in a league of their own though. 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, in contrast to the borrowing capacity of a median household. It uses a point system, where higher numbers mean less affordable, and 1.0 means the full budget. An index of 1.0 means a home costs the maximum budget a median household can afford. If it’s 0.75, the household’s maximum budget is 25% higher. Similarly, an index of 1.25 means a median household needs 25% more than they earn to afford a home. Each city’s score is based on regional incomes.
At first glance, a 1.0 score might seem ideal. However, the more a household spends on housing, the less they have to spend on other areas of the economy. This results in slower economic growth at the expense of real estate. If a region isn’t a luxury region like Monaco, it might have a tough time keeping younger people. Not an issue for wealthy regions with a well-managed tax base. A huge problem for regions dependent on younger people to carry the tax base.
Housing Affordability Fell Across North America
In general, housing affordability fell across English-speaking North America. The US saw its index rise to 0.77 in Q2 2021, up 3 basis points (bps) from the previous quarter. In other words, the cost of housing was 23% lower than the maximum local incomes could support. An obvious culprit here is home prices rising much faster than incomes. Less obvious is mortgage costs creeping back up to higher and more natural rates.
Canadian real estate affordability deteriorated much faster, and started in a worse place. Canada’s index reached 1.35 in Q2 2021, up 5 bps from the previous quarter. Housing costs are 35% higher than the typical household can afford, and are projected to get worse. Not due to rising home prices, which the firm sees hitting a plateau soon. Affordability is set to deteriorate as rates begin to normalize from stimulus-driven levels. Rising rates also tend to push prices lower though, so we’ll see how this goes.
Vancouver Real Estate Is The Least Affordable In North America
Vancouver is once again the king of unaffordable real estate in North America. The index for the City reached 1.71 in Q2 2021, up 3.4 bps from the previous quarter. A median household needs 71% more income than they make to carry homes at these prices. The firm sees rising mortgage rates adding another 6 bps to the index by the end of next year. Good for Vancouver. It needed the win after losing the top spot on the UBS Global Bubble Index.
Toronto Real Estate Is The Third Least Affordable City
Toronto real estate came in third — more affordable than Vancouver, but less than New York City. The city’s index reached 1.56 in Q2 2021, up 3 bps from the previous quarter. The analysts see the index rising another 9.6 bps by the end of next year. A median household needs 56% more income than they make, and that’s going to hit 65.5% by next year.
Toronto recently claimed the spot of the second largest bubble in the world. A real accomplishment, considering it wasn’t considered a bubble city just 5 years ago. That’s some exuberant home price growth.
Los Angeles Real Estate Is The 8th Worst Market For Affordability
Los Angeles real estate came in 8th, looking like a deal in contrast to Vancouver. The city fell to 1.45 in Q2 2021, up 2.7 bps from the previous quarter. It’s forecast to rise another 4.7 bps by the end of next year, still more affordable than Toronto is today.
Ottawa Real Estate Is The 9th Worst Market For Affordability
Canada managed to squeeze in another real estate market with dwindling affordability — Ottawa. The index reached 1.39 in Q2 2021, up 2.1 bps from the previous quarter. Already 39% more expensive than the median family can afford, the firm expects a whopping 17.2 bps climb by next year. That would put Ottawa at Toronto’s affordability level today. Canadian politicians will totally do something, they just need to check the price of their home first.
Montreal Real Estate Is Equally Affordable To Miami, NYC, And Seattle
Montreal real estate used to be known as a place with cheap housing — but you might as well move to NYC at this point. Montreal, Miami, and New York City (NYC) all ranked 1.04 on the index in Q2 2021. Seattle, which is undergoing a notorious housing crisis, was just a hair higher at 1.07. The forecast has Montreal becoming more expensive than NYC on a relative basis by next year. Which makes sense, since Greater NYC’s GDP is the size of Canada’s whole GDP, but Montreal has better bagels. Checkmate.
North American real estate prices are rising at a rapid rate, and it doesn’t matter where — prices are soaring. Boise real estate is now the second least affordable market in North America, if you can believe it. This isn’t a result of fundamentals by any measure, it’s an intended consequence of policy decisions.
There’s 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 trickling into other areas of the economy. This will push rates higher, regardless of whether economies are ready or not. If rising rates don’t trigger a correction, affordability deteriorates further.
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