Home > real-estate > Measures of Housing Affordability – is Canadian housing affordable?

Measures of Housing Affordability – is Canadian housing affordable?

This research report us by far the easiest to read, understand and perhaps right on the money!

The table below illustrates the different measures of a housing affordability and the pros/cons of each… I have written about the first 2 measures before here and here

It is worthwhile noting that method 4 – Carrying Cost is very similar to the housing affordability index published by Bank of Canada which at current levels is close to the affordable range – see chart below.

(Note: this chart is inverted so a higher point on the chart means more affordable and lower means less affordable)

For the technically inclined here is the equation for the above chart:

c = monthly payment on mortgage rate r

r = blended monthly mortgage rate reflecting fixed & variable rates

N = number of payments (300 or 25 yrs)

M0 = 0.95 x P0

P0 = value of average home

CIBC and RBC both recently published their housing reports and warned of overvaluation. I haven’t paid attention to the prior forecasts by the big banks here but I reckon some of them have been sounding the alarm bells since mid 2006-2007.

Secondly, none of these housing measures take account of “animal spirits” or simply, emotion! Let’s not forget that human emotions (along with myriad other factors) played a big role in the housing bubble down south… and housing is more often than not a very emotional purchase. Until consumers realize and understand, it is usually too late and the bubble has burst or the situation is out of hand.

Next, I’ll add a post on the share of housing to Canada’s economy… there was some chatter based on July’s GDP numbers

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