Transitional distribution dynamics of housing affordability in Australia, Canada and USA

The main purpose of this paper is to explore the transitional dynamics of housing affordability indicators of major cities in three developed countries: the USA, Canada and Australia, in the period after the global financial crisis. As the global housing markets are more interconnected today, it is essential to investigate the demographic movement pattern and their impacts on housing market dynamics.

Based on the Markov transition matrix approach and the stochastic kernel technique, a newly established framework named the mobility probability plot (MPP) is adopted to investigate the city-level trends of housing affordability in the three countries during the period 2008-2015.

The results suggest that the transitional dynamics of the USA’s housing affordability trend saliently differs from those of Canada and Australia: in the USA, MPP results reveal that when the price-to-income (P/I) ratio is higher than 3.5 times, it has a high tendency of moving downward in the next period. In Australia, housing affordability tends to continue deteriorating when the P/I ratios are in the range from 8.0 to 8.6. In Canada, the MPP analysis indicates that the P/I ratios tend to increase further when the ratios are between 5.7 and 7.0, and within the range of 8.3-9.5.

This paper adopts an innovative approach to explore the city-level trends of housing affordability in the three developed countries during the period 2008-2015. The distribution dynamics approach has several virtues: first, this approach does not merely focus on the issue of housing affordability but also includes an analysis of the underlying housing affordability distribution. Second, it can clearly show the mobility of the city-level units in terms of the P/I change. Third, it can predict the proportion of the entities in different P/I ratio bands in a number of years ahead and even in the long run.