Housing Purchase Power Parity: Montreal
Housing Purchase Power Parity: Montreal
There is a famous economics theory known as Purchase Power Parity (PPP) and in the 1980s, the publication “The Economist” released their own variation of this theory, called the Big Mac Index1. This theory revealed the value of Big Mac sandwiches in different countries, and factored in the exchange rate to determine if a particular currency was over or under valued.
We’ve developed our own version of the Big Mac PPP, which we use to examine the housing landscape of Canadian cities. We call our theory the “RH INDEX”. Rather than reveal the value of currencies using standard Big Mac hamburgers, we choose to expose the value of Canadian housing markets using standard homes. Our “Big Mac” home is a two-story, detached, three-bedroom, two-bathroom property.2
The next city on our tour is Montreal, where you can find delicious poutine and giant smoked meat sandwiches.
MLS®: 8503312, $389,000
Notes
This quaint home was originally a duplex built 96 years ago. The property is just a few minutes from Préfontaine Station and a short drive away from Olympic Stadium.
Calculations
Using Ratehub.ca’s mortgage payment calculator, we can determine the affordability of this house. By comparing mortgage rates in Montreal, we’re able to find the lowest rate of 3.40% which translates to $1,537 in monthly mortgage payments. Using the Montreal Land Transfer Tax calculator reveals $4,335 in title transfer closing costs.
*5-year fixed rate over a 25-year amortization with 20% down payment, as of August 18, 2011
RH Index
According to CMHC, they expect Montreal MLS transactions to remain level with 2010 as new housing starts decrease this year and into next. One thing to note is that CMHC is expecting the growth of the average MLS price to fall to five per cent.3
The standard price of our “Big Mac” Home is $390,163. Let’s apply the RH Index to determine Montreal’s housing market value.
The implied purchasing power parity is $1.003 to $1.
We divided $390,163 (the standard Big Mac home price) by $389,000 (the Montreal Big Mac Home).
As you can see, the Montreal market is right at par. The actual average house price in Montreal is $300,000, but CMHC is forecasting $312,000 by the end of 2011.4
To understand your financing needs in Quebec’s largest city, talk to a Montreal mortgage broker.
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 According to CMHC: http://publications.gc.ca/collections/collection_2011/schl-cmhc/nh12-61/NH12-61-2011-1-eng.pdf
4Average Home Price in Montreal: http://www.livingin-canada.com/house-prices-canada.html