This study investigates the capacity of the price-to-income ratio to signal overvaluation in the housing market and to reflect household purchasing power. The study introduces and applies an extended indicator, the Affordability-Adjusted Price-to-Income Ratio (APIK) which incorporates mortgage interest rates. A quantitative analysis is conducted on housing market data from Kungsholmen, Stockholm, covering the years 2013–2023.

The theoretical framework is grounded in three economic theories: fundamental value theory, neoclassical consumption theory, and price theory. Fundamental value theory highlights the long-term relationship between housing prices, income, and interest rates. Neoclassical consumption theory explains how households base consumption and housing decisions on expected lifetime income and borrowing costs. Price theory provides a model of supply, demand, and market equilibrium relevant for housing price formation.

Findings reveal that housing prices have increased significantly more than incomes, especially during low interest rate periods. The traditional price-to-income ratio partially captures this but tends to underestimate financial strain in interest-sensitive environments. APIK, by accounting for borrowing costs, offers a more accurate picture of affordability. Regression analysis confirms that both income and interest rates significantly influence square meter prices, with income being the dominant factor, but interest rate effects becoming more prominent in recent years.

The study concludes that while the price-to-income ratio is a useful benchmark, it should be complemented by APIK to reflect true affordability in credit-driven housing markets. Financing conditions are essential for assessing household resilience and potential overvaluation risk.