Purchase power parity (PPP) is an economic theory which helps us understand what the value of a bundle of goods would cost across various currencies, once the exchange rate is taken into account. One of the more famous modern versions of this theory is called the Big Mac Index1. The Big Mac PPP exchange rate between two countries is determined by dividing the price of a Big Mac in one country (in the local currency) by the price of a Big Mac in another country (in that local currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.
Here at Ratehub, we’ll use our own purchase power parity to examine the housing landscape of Canada. Let’s call our rough theory, the “RH Index”. Instead of measuring the price of common Big Mac sandwiches across the world, we’ll use what we believe to be is a “common home” found across the nation – which is a detached, two-storey, three-bedroom, two-bathroom house. We’ll take our RH Index to look at homes across notable Canadian cities and determine if they are under or over-valued compared to the national average home price.
Our first stop is in Canada’s largest city, and according to recent reports – Canada’s most expensive city2. We found the perfect home that met our criteria. Have a look at this exquisite three bedroom, two bathroom home:
MLS®: C2130848 – $799,000
This property is located beside Trinity-Bellwoods Park and is surrounded by Chinatown, Little Italy, and Little Portugal – you can’t get more central than that.
Looking at Toronto mortgage rates, we’re able to determine what the affordability might look like using our mortgage payment calculator. By selecting the lowest rate of 3.49%, the monthly payments are an incredible $3,188 a month*. The city of Toronto is the only city in Canada to have a municipal Land Transfer Tax. The Toronto Land Transfer Tax adds an additional $11,705 to the closing costs.
*5-year fixed rate over a 25-year amortization with 20% down payment
Home sale prices have increased for six straight months in Canada. Toronto, itself has jumped up 1.7% in the month of May3. This particular home is quite expensive relative to the rest of the country and is more than double the average home price in Ontario. The Canadian average of a two-storey home is $390,1634 – 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 $0.49 to $1.
We divided $390,163 (the Canadian average home price) by $799,000 (the common home in Toronto that met our criteria).
This means that you are getting much “less house” for your dollar in Toronto when compared to the Canadian average. The actual average home price in Toronto is $454,0005.
Purchasing a home in Toronto can get expensive. To find the best rates, get in contact with various mortgage brokers in Toronto. They’ll talk to you about your needs, weigh your options, and help you make an informed decision regarding mortgage options. Once you’re close to purchasing a home you should begin looking for a Toronto home inspector and a Toronto real estate lawyer.
1 Big Mac Index: http://www.economist.com/node/8649005?story_id=E1_RGQJDDV
2 Cost of living survey: http://www.mercer.com/press-releases/1311145
3Rising Home Prices: http://ca.reuters.com/article/businessNews/idCATRE76Q44L20110727?sp=true
4 Standard Canadian 2-storey home: http://www.muchmormagazine.com/2011/07/canada%E2%80%99s-residential-real-estate-market-sees-sizeable-year-over-year-price-increases/
5Average Home Price in Toronto: http://www.livingin-canada.com/house-prices-canada.html
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