About the Housing Affordability Index

The index is a ratio where the average quarterly mortgage payment is its numerator and the average quarterly income is its denominator (i.e. the higher the level, the more difficult it is to afford a home). The quarterly mortgage payment is based on a series of monthly mortgage payments that are calculated as follows:

Where the monthly payment c depends upon the mortgage rate r (expressed in monthly terms), the number of monthly payments N (assumed in our case to be 300 or 25 years), and the total value of the mortgage M₀. Note that we assume a 95 per cent loan-to-value ratio, so M₀=(0.95)*P₀, where P₀ is equal to the value of the average home.

The mortgage rate r is a blended rate reflecting both a 5 year fixed mortgage rate and a variable mortgage rate (proxied in this case by the prime business lending rate). Neither of these measures account for discounts on the posted rate. The weights given to each interest rate are inferred from the Canadian Financial Monitor Survey provided by Ipsos Reid.¹

In order to better capture the value of both new and existing homes, P₀ is an equally weighted average of the Royal LePage Resale Housing Price (RLPHP) and the New Housing Price Index (NHPI) scaled to $144.6K in 1990Q1.²

Average quarterly income is calculated by taking the level of disposable income from the National Income and Expenditure Accounts and dividing it by total employment from the Labour Force Survey.

The Bank of Canada index is constructed with an emphasis on timeliness so that the index can be used for short-term forecasting. For this reason the Bank of Canada index uses the average income measure derived from the National Income and Expenditure Accounts and Labour Force Survey rather than average household income data, since the latter is only published with a substantial lag. This is also why the Bank’s measure does not account for property taxes, insurance, and utilities.