Abstract
I find that high home-buying costs for a typical household, relative to a cumulative city-level average, help to predict downward pressure on future real house price growth at a 1-year horizon for Canadian cities over the 1980q1 to 2016q2 sample period. This insight is relevant for broader household vulnerabilities because of their interdependence with housing market conditions --- this interdependence is illustrated, for instance, by how a decline in house prices Granger-causes an increase in mortgage arrears. Based on ease of interpretability, relevant historical context, and in- and out-of-sample performance, local housing cost (i.e. affordability) measures may have some advantages for the monitoring of household sector vulnerabilities, versus other common measures such as debt-to-income.
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