Housing Purchase Power Parity: Calgary
Housing Purchase Power Parity: Calgary
During the early part of the 20th century, a Swedish professor helped develop what is called the Purchase Power Parity. This economic theory reveals the value of a bundle of goods and what they cost across different currencies once the exchange rate is taken into account. Flash forward 70 years later, and a more modern theory comes to light. The Big Mac PPP exchange rate between two countries is determined by dividing the price of the burger in one country, by the price of the hamburger in another country. This value is then used to compare the actual exchange rate. If the value is higher, then the first currency is over-valued; lower, then it is under-valued.1
Ratehub.ca has developed a rough iteration of the Big Mac PPP. We call our theory, the “RH Index” and we’ll be using it to determine the value of housing markets across Canada. Instead of measuring the price of the famous McDonalds burger across different countries, we’ll use the pricing of what we’ve determined to be the “common home”. Our “Big Mac Home” is defined as two-story, centrally-located, three bedroom, two bathroom home.2
Our next city is home of the Stampede Festival, in Calgary, Alberta. Let’s take a look at the value of their housing market.
MLS®: C3483896, $484,900
Notes
This charming home located in the Bridgeland neighbourhood, is just across the river from Chinatown. The home was also built the same year the Titanic took its maiden and final voyage.
Calculations
Let’s take a look at the affordability of this home by comparing mortgage rates in Calgary. Currently, market conditions are favourable and the best rate is 3.09%. Using our mortgage payment calculator reveals that it costs $1,854 a month to afford this property. And since the Alberta Land Transfer Tax does not exist, the title transfer fee is only $132.
*5-year fixed rate over a 25-year amortization with 20% down payment, as of August 16, 2011
RH Index
Calgary has a healthy housing market, as evidenced by their average home prices, although not as lucrative as Toronto or Vancouver. New housing starts should start to see a decline in 2011, but rebound later in 2012. CMHC believes residential MLS sales next year will increase 2.3%, which is skewing downward from the 4.8% increase in 2010.3
The Canadian average price of a two-storey home is $390,163 – which is what we will be using as our index.
How similar is this home when compared to the average Canadian price? What is the value of the home’s price tag versus the Canadian average price?
The implied purchasing power parity is $0.80 to $1.
We divided $390,163 (the “Big Mac home” price) by $484,900 (the common home in Calgary that met our criteria).
This means that you are getting slightly “less house” for your dollar in Calgary when compared to the Canadian average. We can say that Calgary`s housing market is slightly over-valued. Alberta has been hovering around the National average home price for most of this year, so you can expect to purchase a home generally “at par” in Calgary, give or take a few thousand dollars. The actual average home price in Calgary is $401,000.4
It’s best to seek a Calgary mortgage broker to help you with financing options. They have valuable industry knowledge and will work to find you the best rate for your situation.
Sources
1 Big Mac Index: http://www.economist.com/node/8649005?story_id=E1_RGQJDDV
2 Standard Canadian two-storey home: http://www.muchmormagazine.com/2011/07/canada%E2%80%99s-residential-real-estate-market-sees-sizeable-year-over-year-price-increases/
3 CMHC: https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?cat=107&itm=1&lang=en&fr=1313513300031
4Average Home Price in Calgary: http://www.livingin-canada.com/house-prices-canada.html