Early this week, Wendell Cox released his latest annual survey of housing affordability of metropolitan areas around the world. “Housing affordability cannot be evaluated except in relation to incomes,” he notes, and he compares median home prices with median household incomes in each of 293 urban areas.
At one time, he says, home prices in nearly all of these urban areas were between two and three times household incomes, and they still are in dozens of housing markets in the United States and Canada, as well as a few in Ireland. In other parts of the world, however, home prices have risen to, in some cases, more than ten times household incomes. Of the 293 urban areas documented by Cox, about a quarter have median home prices that are more than five times incomes, and another quarter are between four and five times incomes.
In the United States, lenders generally allow borrowers to pay up to 28 percent of their incomes on a mortgage. At 4 percent interest, a household can dedicate 28 percent of their income to a mortgage on a home that costs three times their annual income and pay it off in 15 years. When home prices reach four times their annual incomes, they need more than 20 years to pay off the loan. At five times their incomes, more than 30 years are required. At six times their incomes, they would need to get a 48-year loan, which is not available in current markets. At seven times their incomes, it becomes impossible for them to buy the house without dedicating more of their incomes to the mortgage than most lenders would allow. Continue reading
