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Housing Affordability Index

About the Housing Affordability Index

The affordability index provides an estimate of the share of disposable income that a representative household would put toward housing-related expenses. The measure is a ratio, where the numerator, housing-related costs, is the sum of the average quarterly mortgage payment plus utility fees and the denominator is the average household disposable income (i.e., the higher the level, the more difficult it is to afford a home). Quarterly housing-related costs (denoted by c) are based on a series of monthly mortgage payments and utility fees that are calculated as follows:1

where r is the effective mortgage rate, which is a weighted average of discounted 1-, 3- and 5-year fixed-rate mortgages and the discounted variable-rate mortgage. The weights given to each interest rate are calculated from the Canadian Financial Monitor Survey provided by Ipsos Reid.2

N is the number of monthly payments (assumed to be 300 over 25 years) and M0 is the total value of the mortgage, where we assume a 95 per cent loan-to-value ratio, so that M0=(0.95)*P0.3 P0 is the 6-month moving average of the Multiple Listing Service average resale price; therefore, this measure strictly reflects existing homes and would include all housing types sold in Canada.

U refers to utility fees, which are based on the consumer price index for water, fuel and electricity.4 This series is scaled to the average level of spending on utilities by homeowners for their principal accommodation from the 2011 Survey of Household Spending.

The denominator, average household disposable income, is measured by using total quarterly household disposable income from the National Income and Expenditure Accounts, divided by the number of households in Canada. Our estimate of households is based on census data and is calculated using an extrapolative headship-rate method.5

1 We do not include property taxes separately as an additional cost, since property taxes would already be removed from our measure of income to avoid double counting.
2 Weights are assumed to be constant after the last data point.
3 Our measure does not include mortgage insurance premiums.
4 Before they are included in the index, these data are seasonally adjusted.
5 For more details on this calculation, see United Nations Manual VII (1973) “Methods of Projecting Households and Families.”