Vancouver

Editorial: Five Reasons Why the Demographia Affordability Report is Nonsense

Vancouver is an expensive city in which to buy real estate, no doubt. But the annual affordability survey from Demographia should simply not be heeded

By
REW.ca
January 26, 2016






Vancouver at sunset

Ah, the annual Demographia International Housing Affordability Survey. Guaranteed to make Vancouverites weep into their lattes while making anyone who understands anything about real estate snort with derision.

If you read the local and national mainstream media headlines, you may have read yesterday’s release by Demographia announcing that Vancouver is the world’s third most unaffordable city for real estate. Ooh, progress – last year we were the second-least affordable.

For those of you unfamiliar, Demographia assesses “affordability” by comparing the median price of a home with the median income. This year, it found that Vancouver’s US$756,200 house price and median household income of US$69,700 create a median multiple of 10.8, which is beaten out only by Hong Kong (19.0) and Sydney (12.2). Headline-worthy numbers indeed.

What most of the articles fail to point out, however, is that Demographia’s methodology is highly flawed. Here are the five reasons to take its results with a healthy dose of salt – or indeed, to ignore them entirely.

#1. Only Nine Countries Surveyed

The main problem, which some newspapers do observe, is that only cities from nine countries across the globe are surveyed. The countries are Australia, Canada, China (Hong Kong), Ireland, Japan, New Zealand, Singapore, United Kingdom and United States. So it’s entirely possible that there could be less “affordable” cities in any of the other 180-plus countries in the world.

Demographia’s reasoning? According to REW.ca’s sister website BIV.com, “Demographia has explained that the reason why it only ranks cities in nine countries is that in many other countries, real estate price information is not reliable.”

Seriously? Sure, it might be tricky getting reliable data from Sierra Leone, or Kazakhstan, or Ecuador, maybe. But… Sweden? Germany? Saudi Arabia? (I could go on…) Did they even try?

#2. Vancouver’s Median Price is … How Much?

Demographia claims Vancouver’s median home price (not detached – this includes all property types, including condos) is $756,200 US. That’s $1.08 million in today’s prices. Now, sure, our exchange rate is dire right now, but even if you took last fall's rate, you’re looking at at least $900,000.

Why so much higher than the real estate board’s benchmark price of $760,900 Canadian

Demographia has been accused of over-weighting detached home prices and overlooking townhomes and condos. Certainly something screwy is going on with its calculations.

However, I also think it overestimates our median income at US$69,700, so perhaps this point is moot.

#3. Price vs Income is Irrelevant Anyways

Even if all the world’s 180 countries had been surveyed, and the right median price used, the report would still be nonsense. This is because median house price versus income is a totally irrelevant measure of affordability. By that measure, for example, there’s no way I’d ever be able to afford the two-bedroom West End condo that I bought last year on my editor's salary. And yet I can afford it, and comfortably, because my mortgage is low. How can this be?

That’s because income is only part of what enables a person to afford a property. Their own personal equity, whether from private wealth, or the sale of a previous house, or inheritance, or savings, or a gift from the Bank of Mom and Dad, is the other huge part of this. And of course, this is not taken into account in Demographia’s survey.

In Vancouver, there is massive private wealth behind the scenes, both in terms of people who are sitting on huge equity in their houses or wealthy immigrants bringing in money from overseas. So the prices get propped up by that wealth – it’s one of the very reasons prices are so high. Local salaries are only partly funding Vancouver real estate. So you can’t compare Vancouver's market with that of a city where there is relatively little private wealth.

A much better measure would be to take the median mortgage being paid out in Vancouver and compare that with the median income. And then calculate how many of those individual mortgages are being jointly paid by two income-earners, and how many by a single person, to calculate the median monthly mortgage payment per salary-earning homeowner. That would tell a whole different story about affordability.

#4. Interest Rates Vary Over Time, and Globally

As a continuation of the above, you would also have to bear in mind interest rates, which in Canada are at historic lows, making mortgages much cheaper to service (therefore being another factor propping up our prices).

Demographia doesn’t seem to understand this. Its report defends its methodology, saying, “More elaborate indicators, which mix housing affordability and mortgage affordability ... provide only a ‘snapshot,’ because interest rates can vary over the term of a mortgage; however the price paid for the house does not. If house prices double or triple relative to incomes, as has occurred in many severely unaffordable markets, mortgage payments become much higher.”

Erm, not if interest rates plummet, they don’t. If rates go down, mortgage payments can stay the same or reduce, even if house prices go up. For example, because of our low mortgage rates, it could easily cost about the same to service a $600,000 mortgage today as a $200,000 mortgage in the early 90s, which would be essentially on the same property. And salaries have risen since then. So…

#5. What About Transportation Costs?

Demographia only considers housing costs, but affordability should be based on combined housing and transportation costs, as there are trade-offs between the two. A supposedly affordable home is not truly affordable if it is an area with high transportation costs. Households can afford to spend more on housing costs in areas where it is possible to reduce transport expenses.

Some of Vancouver’s most expensive areas to buy a home are relatively close to downtown and/or are very walkable communities with lots of amenities. So people living there are likely to have reduced transport costs, compared with other cities on Demographia’s list.

All of which to say, if you’re reading about the Demographia survey, or indeed any of the almost-as-flawed affordability surveys that are constantly being pumped out, please think twice. 


Joannah Connolly has been editor and content manager of REW.ca since May 2014. Joannah has appeared on major local TV outlets as a real estate commentator, and has moderated and spoken on several industry panels. During this time, she also spent two years hosting the Real Estate Therapist radio show on Roundhouse Radio 98.3FM. A dual Canadian-British citizen, Joannah has 20 years of journalism experience in Vancouver and London, with a prior background in construction, architecture and business media.
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