|Canadian Home Price to Income Ratio|
Canadian Home Price to Income Ratio
The price to income ratio is the basic affordability measure for housing in a given area. It is generally the ratio of median house prices to median familial disposable incomes, expressed as a percentage or as years of income. It is sometimes compiled separately for first time buyers and termed attainability. This ratio, applied to individuals, is a basic component of mortgage lending decisions. According to a back-of-the-envelope calculation by Goldman Sachs, a comparison of median home prices to median household income suggests that U.S. housing in 2005 is overvalued by 10%. "However, this estimate is based on an average mortgage rate of about 6%, and we expect rates to rise," the firm's economics team wrote in a recent report. According to Goldman's figures, a one-percentage-point rise in mortgage rates would reduce the fair value of home prices by 8%.
The Impact of Rising House Prices to Income
The ratio of house prices to Income remains an important guide to long term affordability of housing.
Nevertheless, the rising ratio of house prices to incomes does raise some serious concerns.
Problems of Rising House Price to Incomes Ratios
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