Future homeowners now have a new tool, the Desjardins Affordability Index (DAI), to help them better assess housing market risks and anticipate large fluctuations in home prices. Developed by the economists at Desjardins Group, the DAI evaluates household ability to purchase a home and assume the related costs.

“An affordability index allows you to determine whether the level of home prices is sustainable by comparing the costs of owning a home with household income. This is an important issue in the current economic context,” explained Desjardins economist Mathieu D’Anjou. “The Canadian economy has been showing signs of slowing since the beginning of the year and it would have a tough time dealing with a sharp downturn in the housing market. This is all the more true for Quebec and Ontario, where economic growth has been particularly weak of late.”

The DAI value is calculated by taking the ratio of average household disposable income to income required for a financial institution to agree to finance the purchase of an average-priced home (qualifying income). For example, an increase in the DAI means that the housing market is becoming more affordable.

In general, Desjardins’ economists have noted that the DAI fell slightly in the third quarter of 2006 and that while some markets are still affordable, especially Thunder Bay and Windsor, affordability has dropped in most metropolitan areas of Quebec and Ontario. In these provinces, the markets of Montreal, Sherbrooke, Saguenay, St. Catharines-Niagara and Ottawa-Gatineau should be watched because the DAI in these areas is well below its historical average. However, even in Montreal, where the DAI has fallen the most, the situation is far less worrisome than in western Canada, particularly in Calgary, where the overheated market drove the DAI down to a new historic low in the third quarter.

“Although the drop in affordability was much less pronounced in the last quarter, the trend is still negative and the index is now significantly below its historical average. This means that the housing market is no longer affordable and cannot support any further sharp hikes. Fortunately, affordability remains well above the levels reached in the early ‘90s, that is, before the last price correction,” added D’Anjou.

The DAI is calculated using data from the most reputable sources in Canada. Its methodology and form are based on the Housing Affordability Index produced by the U.S. National Association of Realtors. It is calculated for Canada, Quebec and Ontario and is also available for all census metropolitan areas of both provinces as well as for the cities of Calgary and Vancouver.