This blog explores changes in the energy industry from an insider’s perspective as it transitions from the old centralized utility model to the new paradigm of distributed generation.
This blog was previously called Inside the Housing Evolution and focused on energy efficient homes. Ultimately, it’s all linked. Soon, every building will have the potential to generate, store, and sell energy. Welcome to the era of the transactive grid – the greatest shift the electricity sector has seen in over 100 years!

September 19, 2014 4 Comments

Why Ottawa Home Prices Will Continue to Rise

Cross posted from the Ottawa Citizen on Sept. 13th, 2014.

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.

forsale

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.

Posted by Matthew

4 Responses to "Why Ottawa Home Prices Will Continue to Rise"

  1. Gary Martin says:

    I have to question your use of aggregate stats to “explain” house prices. It represents the same lack of nuance offered by the Greater Ottawa Home Builders’ Association which repeatedly blames “government-induced land shortages” and development charges for rising house prices. Let’s not forget that housing development and mortgage financing are for-profit industries, and that prices are directly tied to developers’ and banks’ margins. Let’s also not forget that Ottawa’s economy has been whacked by a global recession and local federal job cuts, or that housing has to be “affordable” for the growing number of people who will never be able to afford to buy a house. I understand you must keep these articles short, but that’s no justification for obfuscation!

  2. Francois Forget says:

    IN a city where population is growing (i.e Ottawa), existing house values are somewhat following what it cost to built a new one. New houses are priced as per material (pretty equal across the country) + labor + price of land (150K to 250K average in Ottawa). Some US houses are really inexpensive due to construction (very different building code), non unionized $15 an hour labor and inexpensive land where service infrastructure is added to property taxes (as opposed to lot price here)
    For me this is very simple, as long as the population is growing, even slightly, and there are jobs, house price are due to increase a few digits a year due to material inflation, unionized labor rate, and ever “complex” building code.

    My two cents

  3. Matthew Sachs says:

    Hi Gary,
    In my article I did not make any attempt to “explain” house prices. There are so many factors and so many economic theories that I could not possibly try to. For this article I was more interested in looking at what levels of “affordability” (or “unaffordability” to be more accurate) we are seeing in different regions, to give us a clue as to what might happen in Ottawa. There has to be some level of unaffordability that is simply too high which will lead to a loss in demand or housing crash or other economic or political intervention. Ottawa hasn’t reached that point yet, based on what we see happening in other cities.
    Matthew

  4. Matthew Sachs says:

    Hi Francois, thanks for commenting!
    I don’t believe there is any one simple factor that explains house prices. Cost of materials and land are major factors, but so are interest rates, market demand, rental vacancy rates, government fees (ie taxes and development charges), land availability and scarcity, general economic optimism (or pessimism) and many other factors outside of my knowledge. The invisible hand of economic forces is a complex beast.
    Keep well,
    Matthew

LEAVE A COMMENT

Please note: Comments should be related to the above blog post.
All other comments will be removed.

Name (required)

Email Address (required - will not be published)

Website:

Comment:

ABOUT THE AUTHOR:

Matthew Sachs

P. Eng. LEED AP

  • COO of Peak Power since July 2016
  • General Manager of Urbandale Construction (May 2008 – Oct 2014)
  • Vice-Chair R-2000 Renewal Committee
  • Member of Energy Star Technical Advisory Committee
  • Greater Ottawa Homebuilders Green Committee
  • Recipient of Canadian Homebuilder’s Association 2009 R-2000 Builder of the Year Award
  • Participant in Natural Resources Canada’s Technology Roadmap for Sustainable Housing
  • Energy Consultant with Marbek Resource Consultants (Feb 2002 – May 2006)

ABOUT PEAK POWER

Peak Power is a Microgrid project development company focused on delivering innovative solutions to offset the most expensive hours of electric demand. We specialize in optimizing the revenue streams from energy storage, advanced building automation, and renewable technologies for customer sited and utility scale projects. Please visit www.peakpowerenergy.com.