The Housing Indicator to Watch

mortgage-payment-affordabilityNational home prices are inflated by almost every measure, including: median price/median income, prices/rents and prices/GDP.

In this week’s Globe column, we look at the one demand-related gauge of housing cost that matters most. And its readings are anything but unreasonable (for now).

More: Expensive housing? Not by a 20-year comparison

  1. “Low rates have been pivotal for consumers. They’ve kept interest payments, as a share of disposable income, at just 7.2 per cent, Mr. Tal says. That is below the long-term average of 7.6 per cent and well under the 10.7 per cent level from 20 years ago.”
    Tell me where I can buy a place in Vancouver with interest payment consuming only 7.2% of a median household income of ~$75k? Oh wait, you quoted disposable income, which is much less than $75k.
    Everywhere I read, the mortgage payment (principal + interest) for a median home is anywhere from 50-90% of gross median household income in Vancouver.

  2. Fascinating article Rob. Read it this morning.
    Just curious about something, what is the #1 supply-side housing indicator?

  3. Sell your overpriced Vancouver house and move to Charlottetown. No affordability problems here, and nice views too. :)

  4. Good article, and I agree that too much emphasis is placed on price/income, when the real determinant is monthly payments to monthly income.
    However it is not meaningful to calculate affordability on a national level, since no one is buying a national average house. By the way, the National Association of Realtors has an affordability index too. During their housing crash it only touched 100 once (100 meaning the median family can afford the median home). As you can see, this index was completely useless.
    The only affordability measure that means anything is local affordability by city. You can look up your city on the RBC affordability index.
    In a country the size of Canada, there is no such thing as a national housing bubble. Many places are not in a bubble, some are.
    I made my own chart for my home town of Victoria that is easier to see than the tiny RBC one.
    Here’s the monthly payments:
    And the affordability (unfortunately I don’t have income figures for 2010 and 2011):
    Clearly affordability here is very stretched compared to historic norms, and that at record low rates. Given the history of movements, I’m going to say we can be fairly certain of where it’s headed.

  5. Affordability based almost entirely on emergency interest rates. Read the comments for that article. Nobody’s falling for it.

  6. Now this is the kind of improving affordability I can get excited about:
    >>> Overall Decline: House prices in Dublin are 55% lower than at their highest level in early 2007. Apartments in Dublin are 60% lower than they were in February 2007. Residential property prices in Dublin are 57% lower than at their highest level in February 2007. The fall in the price of residential properties in the Rest of Ireland is somewhat lower at 47%. Overall, the national is 50% lower than its highest level in 2007.

  7. wjk
    There’s nothing to fall for. It’s just a look at how home prices are based largely on affordability. It’s not a recommendation to run out and buy a house. :)

  8. Hi LS,
    Thanks for the post.
    Business and government often need to make decisions based on national activity. That’s why policymakers use statistics like national employment, national wage levels, national price levels (CPI), national productivity, and so on.
    Mortgage affordability is like most other economic data points. Many cities have much better affordability than average. Some have much worse.
    Unemployment is a good analogy. The Bank of Canada relies partly on national employment data to set the most important interest rate in the country. The fact that Calgary has lower unemployment than Toronto doesn’t reduce the importance of knowing the national unemployment level.
    Likewise, while real estate is largely local, national policy issues require regulators to view activity from a higher altitude.

  9. Certainly there is value in national stats such as average price.
    However I maintain that affordability is not meaningful on a national level. It is very unlike unemployment, because national unemployment is useful to see the total number of unemployed residents.
    National affordability has no similar value. It doesn’t tell us how many borrowers have unaffordable mortgages.
    So the only possible use is comparing values over time. But given the spectacular failure of other affordability indexes to predict overvaluation (such as the NAR index in the US), I think there are some other factors that are not being taken into account.
    However in the end I agree with your basic premise, that given any one indicator, I would also choose affordability. Just on a smaller level :)

  10. What’s your point? If you can’t afford Vancouver then move.
    If you choose to live in one of the most desirable cities on earth, then don’t whine about it. Desirable locations have higher prices. It due to a concept you might not have heard of called “supply and demand.”

  11. Your statements are logically inconsistent.
    You claim to see value in national average price data, which is greatly distorted by Vancouver and Toronto. Then in the next breath you pooh pooh affordability numbers which are based on more consistent national data.
    You say “there is value in national stats such as average price.” Then you contradict that by arguing “no one is buying a national average house.”
    Sorry chief. You make no sense.

  12. You get excited by the thought of Canadians losing their life’s equity in a housing crash? How demented.
    That is the last comment I ever read from you.

  13. If Canadian’s “life’s equity” only exists because the price of their house has doubled in the last 10 yes (net of inflation)…well, that’s a problem. We can’t just keep “creating” equity by peddling housing to each other at ever higher prices.

  14. Great article Rob.
    All of the major affordability indexes indicate the same thing – no bubble. A fact that is lost on the naysayers and fear-mongers out there who take every opportunity to sensationalize, without any logical thought.

  15. Is there any research that shows how well this indicator correlates with demand? It’s obvious that when houses are unaffordable, demand will be low, barring a significant under-the-table economy or other factors. But above a crtain threshold of affordability, I would think unemployment, wage growth, household formation and consumer sentiment would be larger factors than absolute affordability. And I haven’t seen much correlation in other markets (which shall remain nameless) either.

  16. Dave is correct. Pushing resale homes back and forth to each other, with each transaction price setting a new high does nothing to contribute to real GDP (not the baloney definition sometimes used by economists to gauge economic activity).
    Again, this all distills back to modern fractional reserve banking along with the use of exotic debt instruments and derivatives in order to enable this sort of “economic activity” to continue. But like all fata morganas, there is nothing tangible to sustain the image in perpetuity. That’s why we’ve seen real estate pain in most developed countries, and ours is not insulated either, despite high commodity prices.

  17. Appraiser,
    You’d do well to read the prior comments about local data vs. national average indices, and check the Nov 2011 RBC Affordability Report that was linked to above. There are serious affordability problems in many major cities, Toronto included.

  18. I think his point is that Vancouver house prices are unsustainably high. It’s hard to argue otherwise.

  19. Perhaps we should layout some facts since Rob had to borrow two top economist’s calculated opinion.
    April 25, 2012
    “Canadian households spent an average of $14,997 on shelter in 2010. Homeowners spent an average of $17,026, while renters spent about two-thirds of this amount, or $10,874.”
    Now use any national average or median income you wish and consider the following two charts:
    Yes, there was a time when living expenses didn’t consume half of people income, while interest on savings helped homeowners pay off their mortgage. Not anymore.

  20. I think sometimes we can over analyse these issues. Many of us remember the October 2008 financial crisis. The fixed rates hardly changed at all but the panic caused real estate prices to drop 15% in 2 months although they recovered quickly once governments addressed the crisis.
    I do believe interest rates are a key driver and all real estate is influenced by locality to some extent but you have to ask yourself why prices in Vanacouver and Toronto HAVE to be double property prices in Portland and Chicago.

  21. Toronto, really? Where’s your data.
    The TREB affordability indicator chart is currently at 32. In 1989 it hit 54. No comparison.

  22. “Perhaps we should layout some facts since Rob had to borrow two top economist’s calculated opinion.”
    Yes because your prejudiced tilt on the facts is much more informative than that of respected analysts.
    I wish people could just make their point without being quarrelsome. It’s so juvenile.

  23. You constantly blow things out of proportion Watchdog. You are a disservice to all who read your posts.
    Insurers have managed defaults in this manner for years. Homeowner Assistance Programs are nothing new and they are a tiny fraction of insurers’ volume.
    I’m sure we can all agree that when someone loses their spouse or job, or has major medical issues, that insurers should not just boot them out on the street. Genworth and CMHC should be applauded for having the heart and business sense to offer these valuable programs.

  24. Everybody knows Vancouver prices are high but that is irrelevant to the bigger issue, which is national affordability.
    Believe it or not, Canada has people living outside of Vancouver and Toronto. 90% of Canadian cities don’t need more regulation.

  25. Right, and you think Ben Tal is just going to come out and say payments are not affordable when the bank he works for is holding re assets and currently increasing their sales force.
    He knows damn well that when adjusting for inflation and accounting for interest on savings, mortgage payments have ‘increased’ over the past 20-30 years, not decreased.

  26. Those affordability problems are still the minority of the country. The markets you’re talking about would correct on their own. All government intervention will do is grease the slide.

  27. Then in the next breath you pooh pooh affordability numbers which are based on more consistent national data.
    Affordability numbers are equally distorted by Vancouver and Toronto. Please explain how they are less distorted than average price data.
    You’re arguing on a tangent though. I have no real use for average national price data either, I just didn’t want to take the position that all national indicators are useless.
    Back to the point, can you refute my arguments why national affordability is not a measure of risk?

  28. It is fact that most people’s payments are basically the same percentage of income as they were 20 years ago. Tal isn’t making that up. There are a 100 other non-bank economists that will tell you the same thing.
    Inflation has nothing to do with it. Both inputs (income and carrying costs) have inflation built in.
    Interest on savings is also completely irrelevant.

  29. Historically low mortgage interest rates may have contributed to a skewed sense of affordability for some home owner/buyers. To be certain that your mortgage (and in essence your home) continues to be affordable as interest rates rise, use online mortgage calculators to compute your mortgage payments. Plug in interest rates that are perhaps 2-3% higher than current interest rates; this exercise will help you understand what cushion you need to build into your budget today, to ensure your debt in manageable in the future.

  30. Totally agree that affordability is an indicator of demand but it should not be used as a decision to buy tool. It is short term in nature as it does not consider changing interest rates over the life of your mortgage.

  31. And it is disingenious to use “affordability” in this context as a reason to buy.
    Not pointing fingers at anyone directly but it is surely done. Even the headline in G&M is misleading in that way.

  32. Great point. Ireland actually had a 4% unemployment rate until the credit dried up in 2007. Then real estate bubble collapsed and all the agents, mortgage brokers, construction workers and the like lost their jobs. Image what our unemployment rate will be when the same happens here.

  33. hi reasonfirst,
    This was a story about what led to the current level of national affordability, on what might change it, and on how it pertains to home prices. That’s it.
    It would be reading far too much into it to assume it was intended encourage home buying. That is anything but the case.

  34. It is fact that most people’s payments are basically the same percentage of income as they were 20 years ago.
    Yes. Unlike watchdog I don’t think the numbers are being fudged, or that Tal is being untruthful, that is conspiracy theory type thinking and holds no interest for me.
    The real question is, does the fact that national affordability is similar to 20 years ago have any bearing on whether we’re set for a real estate decline?
    I bring up the US Affordability index again. Even at the height of their bubble, national affordability was no worse than 20 years ago, and in fact considerably better than the decade before that. How to explain that?

  35. The other side of the story is that affordability will also improve with income gains. In the past it’s been a good idea to stretch your affordability as a first time buyer. As your income increases further into your career, it balances out again.
    The danger now is that interest rates have the potential to outstrip income gains. Or maybe they won’t..

  36. Thanks Martin,
    Trends in listings and months of inventory are both up there in importance.
    CMHC, which does some of the most extensive market analysis in Canada, uses sales-to-listings as a key indicator (the denominator being supply-related, of course).

  37. Diana is right. Radicals who wish losses on people are just sick in the head.
    Jake, You are wrong about GDP. Higher home prices have undeniable wealth effects and support jobs and spending in countless ways. Keep in mind, I’m talking about reasonable price growth like 2-3%, not the unrealistic 5-7% rates we’ve been seeing.

  38. Following your position is dizzying. One minute you see “value” in average prices and the next minute you have no use for them.
    Affordability measures risk at a given point in time. If Canadians as a whole have to pay 48% of income to own a home, that implies much greater risk than if that number were 38%. This is a really simple concept LS.
    Unlike the average price measure which you find “value” in, a proper affordability index does not use mean prices. It uses median prices or prices adjusted for different biases.
    Further to your question, national affordability is useful in the same way national CPI is useful. For example, Canada’s CPI is currently two per cent. Now suppose for a minute that Toronto, Montreal and Vancouver are at four per cent. Four per cent is seriously high!
    However, despite our three biggest cities being way above the mean, that alone would not and should not cause the Bank of Canada to raise interest rates. Doing so would create economic risk for the country as a whole.
    The exact same principle applies to affordability, or any other national indicator for that matter. That is why national affordability data is indispensable despite regional variations.

  39. One minute you see “value” in average prices and the next minute you have no use for them.
    Those two things are different. Just because I personally don’t use them doesn’t mean they don’t have value.
    If Canadians as a whole have to pay 48% of income to own a home, that implies much greater risk than if that number were 38%. This is a really simple concept LS.
    And like most really simple explanations for complex situations, it does not reflect reality. Yes, if all things were equal your statement would be correct. Clearly they are not. Household finances are completely different than they were 20 years ago with more debt, and less cushion (more dual income families, etc). And interest rates are very low and credit much looser. 20 years ago affordability could only get better, now there are many things that could cause it to deteriorate and very few that can cause it to improve.
    Now do you understand why your “risk is lower now” is too simplistic?
    If not, consider why the US housing market crashed, even though affordability was better than it was 25 years ago. Risk should have been lower right?
    However, despite our three biggest cities being way above the mean, that alone would not and should not cause the Bank of Canada to raise interest rates.
    You’re confusing two arguments. I’m saying national affordability is not a good indicator of risk while you’re talking about using it as an argument for further regulation. That’s a different topic entirely.
    Again, if national affordability was an indicator, then no one would have ever suspected a problem in the US.

  40. In reading through the comments there’s one thing that might be getting lost in the shuffle. Affordability is only one indicator. Macro phenomenon can’t be judged by one number alone. (If only economics were that simple.)
    For that reason, affordability cannot be invalidated for failing to predict the crash down south. The U.S. had some unique problems (regulatory, securitization, policy and underwriting related) that standard housing indicators could not pick up.
    In Canada, economists still view affordability as one of the best vital signs the market has. Used in conjunction with other analysis, it provides an improved sense of potential demand.
    In short, when national affordability deteriorates, risk becomes greater for a number of people (wherever in the country they may be), and vice versa. That is a point everyone should be able to agree on.

  41. I’m looking at the RBC Affordability Index charts from the Nov 2011 report linked to above by “LS”. Did you even click on the link?
    Affordability in Toronto is far worse than the national average. Housing costs for a two-storey home are about 60% of household income.
    No, it’s not as bad as the late-80s peak, but it’s well above the long-term average of the last 20 years, and RBC notes this — saying that Toronto is “pushing the envelope” on affordability.
    You can flip through the PDF to see just how unaffordable Toronto real-estate is relative to other sizable cities in Canada. (Vancouver is in a class of its own.)

  42. I didn’t read too much into the article but the headline implies that houses are not “expensive” which is a pretty value-laden term. The headline is misleading but the article wasn’t.
    The point was that less responsible people might use the term “affordibility” to imply a good time to buy and many would fall for this.

  43. I think the Globe chose that headline to abbreviate. “Expensive Mortgage Payments Relative to Income?” would have been more specific, of course, but headlines can only be so long. Sometimes you have to rely on folks reading the story to get the context.

  44. Be careful when applying traditional affordability metrics to Toronto and Vancouver. Affordability calculations ignore the foreign buyer influence and the effect of 7 figure properties, which distort the numbers substantially.

  45. Since incomes and rents increase with inflation it’s the real interest rate that matters for housing. That means the interest in excess of expected inflation. In 2008 expected inflation dropped very fast, so the interest rate in excess of inflation became a bigger number. The credit part of interest rate also went up. Therefore prices started falling. Later, inflation expectations came back up (future income and rent gains) and the credit part came back down.

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