“Affordability” is one of those familiar buzzwords in the world of real estate. But the affordability index is a fantastic metric.
The affordability index is the home purchase price divided by the gross household income. The result is the one number that gives us a look into the real estate health of a household and even an entire city. I have used this tool for years to identify great communities to invest in.
On a city level, a low index indicates that jobs are paying very well in comparison to the price of housing. There’s potential for increased value, since residents have the disposable income to invest in their home and community. People moving into the neighbourhood have high incomes and are able to spend more on a home, driving home prices up. I often see home values increase faster than the national average in cities with a low index.
On the other hand, a high index tells me that people are overextended. Housing costs account for a percentage of their income which is much too high. Households find it difficult to save and invest in their homes. Maintenance becomes neglected as there is no money to pay for it. We may see homes, and even entire neighbourhoods, begin to appear rundown. High index cities can be held afloat by low interest rates in the short term, but home values tend to be corrected down eventually. [full story-->]
By Scott McGillivray - Globe and Mail
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