The 16th Annual Demographia International Housing Affordability Survey has been released and, once again, it ranks Australia as having one of the most expensive housing markets out of the countries surveyed even though affordability improved on the back of heavy price falls between 2017 and mid-2019.
This year’s report assesses 309 urban markets in eight countries: Australia, Canada, Hong Kong, Ireland, New Zealand, Singapore, United Kingdom, and the United States as at the third quarter of 2019.
The survey employs the “Median Multiple” (median house price divided by gross annual median household income) to rate housing affordability. This measure is widely used for evaluating urban markets, and has been recommended by, amongst others, the World Bank and the United Nations, and is used by the Harvard University Joint Center on Housing.
The Survey ranks urban housing markets into four categories based on their Median Multiple, from “Affordable” (3.0 or less) to “Severely Unaffordable” (5.1 & Over) [Table ES-1].
According to the Survey, housing affordability remained poor across most major metropolitan markets in 2019 (i.e. with over 1 million people).
At the national level, Hong Kong has by far the most unaffordable housing, with a median multiple of 20.8. New Zealand is the second most unaffordable market with a median multiple of 7.0, followed closely by Australia (5.9), Singapore (4.6), UK (4.5), Ireland (4.1), Canada (3.9), and the USA (3.6):
As shown in the above table, all but four of Australia’s 23 markets captured in the survey are ranked as either “Seriously Unaffordable” (5) or “Severely Unaffordable” (14).
The next chart shows that Sydney and Melbourne are the third and fourth most expensive major housing markets:
This comes despite their recent heavy price falls:
The overall decline of housing affordability in Australia over the past few decades is also clearly evident in the above Demographia chart. Whereas all major Australian markets, except Sydney, had Median Multiples of three in the early 1980s, today all are ranked at around five or above (well above in the case of Sydney and Melbourne).
Demographia notes that housing affordability has worsened over recent decades across all of the nations surveyed, with New Zealand and Australia fairing especially poorly:
One of the key contentions of the Demographia Survey is that higher land prices are the principal contributor to the rapidly increasing home prices in unaffordable markets, as well as increased speculative activity. These land prices include the cost increasing influence of land supply restrictions (such as urban growth boundaries), excessive infrastructure fees and other overly strict land-use regulations:
Urban containment policy, generally favored in urban planning, has been associated with driving up land prices on the urban periphery, and as a consequence, throughout the urban area (Figure 16). In the process, housing affordability has deteriorated…
The strongest evidence of the middle-income decline is in rising costs of living, which has been far more significant than the well documented income stagnation… Higher costs of living are a threat to the middle-income lifestyle, because they reduce the share of discretionary income and in doing so, reduce the standard of living.
The OECD particularly notes that: “…, the cost of essential parts of the middle-class lifestyle have increased faster than inflation; house prices have been growing three times faster than household median income over the last two decades.” Further OECD finds that “Housing has been the main driver of rising middle-class expenditure,” and that the largest housing cost increases are in the costs of ownership, rather than rents…
Housing tends to be the largest item of household expenditure. Moreover, the cost of living is largely driven by housing costs…
Generally, house prices (to a greater extent than other major expenditure categories) have disproportionately increased relative to incomes where land use regulation has become significantly more rigid (especially with urban containment).
Even in metropolitan areas with administrative mechanisms to ensure sufficient land supplies, housing affordability has deteriorated markedly (such as in Portland, Toronto, and Melbourne).
Demographia’s contention that Australia’s rising home prices have been caused primarily by escalating land costs is supported by evidence. The below chart shows aggregate Australian housing values relative to GDP broken down by the land component and the structure component. As you can see, almost all of the growth in Australian housing values (relative to GDP) has been in rising land values:
Similarly, CoreLogic-HIA recorded massive rises in the value of Australian vacant land in the decade to the previous bubble peak:
A key reason for this land price escalation in Australia (as well as in New Zealand, the United Kingdom, and the expensive markets of the United States and Canada) is that the market’s ability to quickly provide low priced new housing supply is being hampered by restrictive land use regulations, many of which have come into effect since the mid-1990s (Sydney has had long-standing limits on housing development on the urban fringe). Demographia describes the key features and consequences of restrictive housing markets as follows:
More restrictive land use regulation seeks to outlaw the liberal regulation that produced middle-income housing affordability. Typically, urban containment includes urban containment boundaries and related variations (such as urban growth boundaries, green belts, urban service districts, “growth areas” and other strategies that substantially reduce the amount of land available for house building).22 Urban containment policy may also be characterized by terms such as “densification policy,” “compact development”, or “urban consolidation.” Another strategy, “virtual” urban containment boundaries can be established independently by multiple jurisdictions in suburban or exurban areas. Urban containment may be imposed by any level of government and may involve regulations by multiple governments.
By severely limiting or even prohibiting development on the urban fringe, urban containment eliminates the “supply vent” of urban fringe development, by not allowing the supply of housing to keep up with demand, except at prices elevated well above historic norms.
Urban containment policies are often accompanied by costly development impact fee regimes that disproportionately charge the cost of the necessary infrastructure for growth on new house buyers. There is particular concern about the cost increasing impacts of these fees and levies, especially in Australia, Canada (Canada Mortgage and Housing Corporation), New Zealand (New Zealand Productivity Commission) and California.
By contrast, affordable housing markets, like many cities in the US, utilise open market-based land use structures whereby plentiful new housing supply is able to be built quickly and cheaply on the urban fringe, thereby preventing rapid house price escalation. Demographia describes these markets as follows:
Liberal Land Use Policy (Less Restrictive Markets) applies in markets not classified as having more restrictive land use regulation (where competitive land markets are permitted to operate on the urban fringe). In these markets, residential development is allowed to occur based upon consumer preferences, subject to basic environmental regulation. Generally, liberal land use regulation is “demanddriven” Land is allowed to be developed, except in limited areas, such as parks and environmentally sensitive areas. By allowing development on the urban fringe, liberal land use regulation allows the “supply vent” to operate, which keeps house prices affordable. Less restrictive regulation can also be called traditional or liberal regulation. In addition to lower housing costs relative to incomes, the lower population densities typical of liberal markets are associated with less intense traffic congestion and shorter average work trip journey times. Liberal land use regulation has also been called “traditional” regulation.
So, under an open market-based model (provided there are not also substantial physical barriers to housing supply), increased demand, such as from reduced lending standards, easier availability of credit, and/or mass immigration quickly leads to the building of additional low priced housing on the urban fringe, which helps keep house prices in check and reduces the likelihood of speculative housing bubbles developing. Further, highly leveraged speculators are less likely to be encouraged into open land markets, since there is little prospect of achieving strong capital gains. Investing in open land markets is, instead, more about rental yield.
I will add that restrictive urban planning structures should not be viewed as a one-way bet for house prices, with unresponsive land supply also more likely to result in higher levels of house price volatility and boom/bust price cycles.
Why? Because strict land-use policies (planning) steepens the supply curve, which makes house prices more sensitive to changes in demand, increasing the likelihood of the housing market experiencing boom/bust price cycles as demand rises/falls.
The full 2020 Demographia Housing Affordability Survey can be downloaded here.