As the cry for affordable housing goes up across Canada, two recent studies tell us that affordability remains fairly constant for middle and upper income earners. Record-low interest rates have meant housing has been more accessible to modest-income buyers, but what will happen if interest rates climb?

According to the Housing Affordability Index report, compiled by RBC Financial Group, "recent increases in mortgage rates have made home ownership slightly more expensive than last year, but housing continues to be affordable for Canadians and will remain so throughout 2002."

The Housing Affordability Index measures "the proportion of pre-tax household income needed to service the costs of owning a home in Canada." The Index reached a three-year low of 30.6 per cent at the end of 2001 and has risen to 31.4 per cent in the first quarter of 2002. The Index is expected to hit 33 per cent by the end of this year, but report author, economist Carlos Leitao, does not believe this will adversely affect the housing market the way "harmful" Index ratings of 46 per cent did in 1989 and levels of 48.7 per cent did in 1990.

The Index is a reflection of the calculation used by mortgage lenders to determine who they will lend to and how much an individual may borrow. Most lenders use a Gross Debt Service (GDS) ratio of about 28 to 32 per cent. GDS reveals the amount of gross income needed to service the debt (that's make the mortgage payments in plain language). This means that your mortgage payment (comprised of principal and interest), property taxes, half the condo fees, if appropriate, and, often, including heating costs, expressed as a per cent of gross income, must be less than the GDS figure selected by a specific lender in a particular market. If you already have a car loan or other payments to make, the lender uses a Total Debt Service ratio that ranges from 34 to 38 per cent.

The Housing Affordability Index is based on the cost of owning a detached bungalow -- "a typical target for first-time buyers" – not the two-storey models that are hyped by developers as ideal first homes and that are coveted by neo-owners. Therefore, affordability may be further out of reach for first-time buyers than the Index indicates, especially in urban areas and preferred neighbourhoods. In spite of the author's assurances, the Index indicates affordability is already an issue in Vancouver at 47.8 per cent and Toronto at 39.2 per cent.

Affordability is also a concern when it comes to vacation time. Although many Canadians dream of owning a cottage or vacation home, ownership patterns have changed very little over the past 30 years, according to the Survey of Financial Security produced by Statistics Canada. In 1977, just under 6 per cent of households (464,000) owned vacation homes and by 1999 the ownership rate had increased only slightly to about 7 per cent of households (823,000). That's more people, but the same high-income portion of the population is represented, so affordability for the general population has not improved much.

If you haven't bought your cottage yet, don't panic, time may be on your side: