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Housing affordability

A closer look at analysis by Demographia on housing affordability around the world.
April 2019

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The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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At this time each year we like to give airtime to analysis prepared by the Demographia group in relation to housing affordability in a number of countries around the world. The analysis contains far more detail than we can repeat here but the table below is a summary that covers major housing areas in several countries and ranks them on the basis of the median multiple – median house price divided by median household gross income. The data is at the third quarter of 2018.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Major Housing Markets ranked by Affordability

(covering Australia, Canada, Hong Kong, Ireland, New Zealand, Singapore, UK and USA) Data as at 3rd Quarter 2018 Top 20 Markets ranked by median multiple

Source: Demographia International Housing Affordability Survey – 15th Annual Survey (January 2019)

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

In Switzerland, this document is issued by BMO Global Asset Management (Swiss) GmbH, which is authorised and regulated by FINMA.

Demographia rate any multiple above 5.1 as “severely unaffordable”. All of the 20 markets in the above table fit into that category with the outlier, as always, being Hong Kong. This is a market where property prices are simply extraordinary thanks to government curtailment of land availability and the influx of mainland Chinese money into the market. Will it end? Probably, and it won’t be pretty when it does. Those with long memories will recall the time when Hong Kong real estate was a classic boom and bust tale. Lately, it has only been of the boom variety, but history has a way of repeating itself.

Australia always features prominently in the Demographia analysis, with all five of the major markets rated as “severely unaffordable”. However, times are a changin’. In calendar 2018, property prices fell in each quarter, with an accelerating trend as the year progressed.

Use our handy glossary to look up any technical jargon.

Australia: House Price Index

(Quarter on quarter % change)

Source: Thomson Reuters Datastream

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Sydney has been the epicentre of the housing bubble and is now the epicentre of the fall. Prices topped out in the June quarter of 2017 and are now down around 15%. In calendar 2018, according to the Australian Bureau of Statistics, prices fell by 7.8% but a sizeable 3.7% in the final quarter. We cannot find another quarter with such a significant price drop in Sydney – even during the Global Financial Crisis. A new acronym has started popping up in the Australian press – FONGO (fear of not getting out), as opposed to FOMO (fear of missing out).

Analysis by Demographia suggests that: “Available data shows that house costs have generally risen at a rate similar to that of household incomes until comparatively recently. This is consistent with cost trends among other basic necessities, such as personal transport, food and clothing…Historically, the Median Multiple has been remarkably similar among six surveyed nations, with median house prices from 2.0 to 3.0 times median household incomes (Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States). Housing affordability remained generally within this range until the late 1980s or late 1990s in each of these nations.”
 

So what has changed?

In a nutshell, availability of credit and urban containment policies – the latter placing an artificial cap on available land. The credit phenomenon, particularly in Canada and Australia, is apparent from the chart below. In both countries it has now reached an extreme, whereas in the US and UK it has significantly moderated.

Household Debt to Disposable Income

US, UK, Canada & Australia

Source: Thomson Reuters Datastream

In Australia, the rise in house prices has been aided by a surge in housing purchased for investment purposes – either in a superannuation (pension) fund or as a regular investment, which capitalises on Australia’s unique negative gearing practice. This allows losses from property investment to be written off against normal income. Many “small” investors own a string of properties designed to produce a net income deficiency after borrowing and other charges have been taken into account. They usually end up paying no tax at all.

This game appears to be changing for several reasons – bank and non-bank lenders have tightened credit criteria; supply has increased; foreign demand has eased; the opposition Labor party has declared it will modify the negative gearing rules if it gains power in this year’s general election (a strong possibility) and the tumble in prices over the last year has set nerves on edge. One thing that is bound to upset a heavily geared property portfolio is negative equity.

The fall in finance for investment properties is pronounced. It peaked in April 2015 and is now down some 37%.

Australia: Investment Housing Finance (all lenders)

Purchase of dwellings for rent or resale

Source: Thomson Reuters Datastream

Property prices ultimately relate to affordability, although they can get out of whack for significant periods, as we have seen over the last 20 or so years. Nevertheless, there are many markets around the world that have median multiples of 4.0 or less according to Demographia. Our guess is that several more will join them over the next few years.

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