Rating Housing Affordability
January 27, 2012
The 8th Annual Demographia International Housing Affordability Survey compares prices across seven countries: Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States. While data of this kind has only recently been released and effectively compiled, its uses in assessing nations' housing policies and land use regulations are substantial, say Wendell Cox, an adjunct scholar with the National Center for Policy Analysis, and Hugh Pavletich, editor of Performance Urban Planning.
The data is presented using the metric of the median multiplier: the ratio of the median house price divided by gross annual median household income. This scale provides a decently accurate and easily understood means of comparison. Figures typically range from 3.0 to 5.0 and are divided into four categories: "affordable" (below 3.0), "moderately unaffordable" (3.0-4.0), "seriously unaffordable" (4.0-5.0), and "severely unaffordable" (above 5.0).
- Within the seven surveyed countries, 325 markets were analyzed.
- Of the 128 "affordable" markets, 117 of them were located in the United States and another 9 were in Canada.
- Of the 87 "moderately unaffordable" markets, 64 of them were located in the United States.
- Of the 211 American markets that were analyzed, only 16 and 14 were found to be "seriously unaffordable" and "severely unaffordable," respectively.
- The United States also had the lowest national median of 3.0, compared with 3.5 for Canada, 5.1 for the United Kingdom and 12.6 for Hong Kong (the highest of the seven).
These results were even more starkly in America's favor when isolated to major markets (more than 1 million inhabitants), in which all 24 of the "affordable" markets were in the United States.
In analyzing the enormous amount of data made available by the survey, researchers built on a body of evidence that suggests strongly that restrictive land use regulations artificially drive up prices. One literature review compiled 25 studies of housing prices over the course of 30 years and further supported this argument. Administrators of that study found that more restrictive regulation had been associated with up to nearly 87 percent of house price increases and a 61 percent hike in new house prices.
Land use regulations drive up prices by limiting the amount of land that is zoned for residential uses. This creates an artificial scarcity that, by limiting supply, leads to the aforementioned price increases.
Source: Wendell Cox and Hugh Pavletich, "Rating Housing Affordability," Demographia, January 2012.
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