Matthew Sachs
Published on: September 11, 2014 Ottawa Citizen
The median multiple, an indicator of housing affordability, shows Ottawa ranks lower than other major cities in Canada in terms of housing costs.
It seems like home prices keep going higher. While this may be good news for investors, it reduces the quality of life for anyone who has to put more money toward mortgage payments and makes it difficult for first-time buyers to enter the market. Housing affordability affects everyone, so it’s useful to look at where Ottawa currently stands in order to better understand where prices may go in the future.
The most straightforward indicator of housing affordability is something called the median multiple. It’s calculated by dividing the average house price by the average annual household income (before tax). This indicator allows the comparison of affordability between different regions, different currencies and different years.
The median multiple has been studied for many years, and the general conclusion by economists is that a median multiple of three or less indicates affordable housing, while anything higher than three is not considered affordable. Put simply, you shouldn’t spend more than three times your annual household income on a home.
An annual international survey of the median multiple for more than 300 cities has found that Ottawa has a ranking of 3.5, or moderately unaffordable. That may sound high, but Ottawa actually has the lowest median multiple of any major city in Canada.
The median for Canada as a whole is 3.6, and the median for Canadian cities with populations over one million is 4.7: Montreal comes in at 5.1; Toronto at 5.9; and Vancouver leads the pack at a whopping 9.5 — the second highest in the world behind only Hong Kong.
How can it be that so many of us live in homes we can’t afford? Through sacrifice.
High housing costs have a direct impact on our standard of living because there is less money to spend on other goods and services. We’re also put at more risk of losing our homes if hit with unexpected expenses, job loss, sickness or change in interest rates. The lack of discretionary spending has a further negative impact of slowing the overall economy in a vicious cycle.
This rampant lack of affordable housing is a relatively recent phenomenon. The median multiple for Canada had been consistently under three for the decades following the Second World War right up until the early 2000s.
There are many factors that contribute to rising housing prices, and different economic theories that try to predict what causes housing prices to rise and fall. Even without understanding the details of why housing prices are what they are, a comparison of housing affordability between different cities can tell us a lot about what we might expect, at least in terms of a purchaser’s ability to accept higher prices.
Although Canada may be considered moderately unaffordable, we are actually doing much better than most other developed countries.
Of the countries in the survey, only the post housing crash United States and Ireland have lower median multiple scores (3.1 and 3.2 respectively). The United Kingdom (5.1), New Zealand (5.3) and Australia (5.6) have all fared worse.
Unfortunately, this implies that Canada has the potential to suffer through even higher housing prices before reactive economic forces or direct government intervention change the situation.
To bring the same message closer to home, with a median multiple rating of “only” 3.5, home prices in Ottawa have the potential to rise much higher before they get to be as unaffordable as most other major cities in Canada.
