If you have had even a mild interest in Toronto real estate, you would know that just two months into 2017, and it’s already a crazy year. And that’s putting it mildly. It’s not just Toronto though. The hot pricing is region-wide.  Kitchener, Guelph, Hamilton, Mississauga, and the Durham region are also seeing an uptick in housing prices. This has led many people to contemplate Toronto’s affordability. So, let’s dig into a recent survey that provides one worldwide perspective on how Toronto stacks up against other international cities. Let’s ask how affordable is Toronto compared to other cities?

I’m drawing on statistics from an organization called Demograhia, who have done their 13th annual International Housing Affordability survey, based on the 3rd quarter of 2016. The nutty start to Toronto’s 2017 real estate market in is not included. They took data from the metropolitan areas of nine countries (Australia, Canada, China-Hong Kong only, Ireland, Japan, Singapore, the United Kingdom, and the United States). Continental Europe is left out of this survey so keep in mind that cities such as Paris, Geneva and Copenhagen – notoriously expensive cities – are not included.

What is interesting about this survey is how they determine affordability by taking the median housing price and divide it by the median household income. The higher the number, the more unaffordable a city is.

There are many cities that are considered “severely unaffordable”.  Toronto is one of them, but not as much as other cities. The top ten least affordable cities with their affordability score are:

1. Hong Kong (18.1)
2. Sydney (12.1),
3. Vancouver (11.8)
4. Auckland (10.0)
5. San Jose, California (9.6)
6. Melbourne (9.5)
7. Honolulu (9.4)
8. Los Angeles (9.3)
9. San Francisco (9.2)
10. Bournemouth and Dorset, UK (8.9)

Toronto’ score in 2016 was 7.7. (that’s 27^th out of 406 cities of all shapes and sizes). Compared to cities of equivalent size, like Dallas with a score of 3.7, Toronto feels expensive. Toronto’s affordability is better when compared to Vancouver, Sydney, or San Francisco, as well as other cities not in the top 10, like London and San Diego.

Toronto’s affordability is moving towards the “unaffordable” end of the scale. In 2015, Toronto had an affordability score of 6.7 compared to 2016 at 7.7. According to the survey, the one point difference between 6.7 in 2015 and 7.7 in 2016 for Toronto is equivalent to an average yearly income. So, over one year, the value of the average property has gone up by an average yearly income.

The affordability angst in Toronto, though not as extreme as other cities in the survey, has led to some out-migration to less expensive markets in the region. This, in turns, has created a ripple effect to increased prices in nearby cities and suburbs. Toronto’s affordability has been relatively flat since 1970, but has increased substantially since the mid-2000s. This trend is consistent with other popular cities that have seen steep decreases in affordability like Vancouver, Sydney and Auckland.

One thing Toronto has in common with less affordable cities is a restrictive land policy with its Green Belt. Development is restricted in a portion of land that rings around the GTA. There are, however, “supply vents” beyond the Green Belt which allow for housing and expansion. A Canadian city that has both an affordability problem and no supply vent is Vancouver. Mountains and the ocean are not only pretty, they are also a substantive barrier to most development.  Compare this to a city like Dallas, Texas. They have endless urban sprawl, which allows for housing stock to be added. That keeps median prices down. But sprawl is not good for the planet, and is reliant on cars. In addition, poorly planned neighbourhoods don’t encourage a community. If that’s too weepy and liberal for you, understand that cities with low density sprawl also have a smaller tax base, which presents challenges to maintain the city. And that means more taxes.

If Toronto’s affordability continues as it is, we will likely see fewer younger people as they increasingly look to buy further away in more affordable places with less expensive mortgages and rents. This would be a net benefit to nearby areas and may even spur regional transit development. (Yes, I dare to be hopeful!) It could also put pressure on the government to revisit their housing policy, though hopefully not at the expense of the Green Belt which, if given over for development is estimated to be used up in 15 years.

You can look at Toronto’s unaffordability in one of two ways. If we reach the same crunch as Sydney, Vancouver, Auckland or London, then we may become a “luxury” city. That transformation may not be over yet.

On the other hand, Toronto’s market may change. Interest rate hikes, or some other kind of volatility, could cause the market to change direction, which could make Toronto become more affordable. My hunch is that the government will once again step in and try to cool prices in some way. I have a feeling a foreign tax may be coming our way. I’m not sure how helpful that will be.

The government really should find ways of adding more supply to Toronto. Some suggestions include allowing for laneway housing, a quicker development process that allow for a quicker turnaround while still keeping developers accountable for quality buildings.  They could also liberalize some of their zoning restrictions.

The affordability problem of top cities has developed, in part, because of the demand to live in them. The success and appeal of these cities undermines their affordability. What makes cities expensive are the jobs they produce. San Francisco, in part, became expensive as the city developed as a technology hub.

The survey speaks negatively to the cities with affordability restraints, and rightly so.  It provides considerable challenges to the middle class and first-time buyers. On the other hand, the survey positively outlines the cities that are affordable, suggesting that these cities are good places to live. I question that. Most of the affordable cities over one million inhabitants are rustbelt cities in the United States, and some have shrunk by more than of their peak population in the 1950s and 60s. They are not exactly magnets for high paying jobs. Some of the less expensive cities include: Rochester, New York (2.5), Buffalo (2.6), Cincinnati (2.7), Cleveland (2.7), Pittsburgh (2.7).  This may point out the biggest flaw to the survey. Affordable cities are affordable because many people do not want to live there. They often offer less well-paying employment, and do not have the attraction that less affordable cities have. Would it be worth it to move to an affordable city?