Housing Purchase Power Parity: Edmonton

Alyssa Furtado
by Alyssa Furtado August 15, 2011 / No Comments

In the early 20th century, a Swedish economist helped develop what is known today as Purchase Power Parity (PPP). This theory measures goods across different currencies, factoring in the exchange rate, to determine the value (over or under) of those particular goods. In the latter part of the 20th century, the publication “The Economist” developed their own version of this theory. Their index measured the price of Big Mac Sandwiches in numerous countries to determine the value of those international currencies against the exchange rate. If the measurement taken is lower, then the first currency is under-valued. If the measurement is higher, then the first currency is over-valued. This was known as the Big Mac Index1.

Well, here at Ratehub.ca, we’ve developed our own little economic theory which we’ve aptly named, the “RH Index”. We’ll use our theory to determine the value of housing markets across Canada measured against the common home. Instead of the price of Big Mac hamburgers, we’ll use the pricing of two-story, centrally-located, three-bedroom, two bathroom homes.

The next city on our list is Edmonton, Alberta – which has seen market stabilization in sales and resale home prices this past year. The average Edmonton MLS residential resale price rose by 2.6% in 2010, but has fallen by that same mark within the first three months of 2011, but CMHC is forecasting a moderate upswing in home prices by the end of 2011, and into next year2.

MLS®: E3271304, $289,000

Housing Purchase Parity

Notes

This is actually over a hundred years old! It was built in 1910, meaning this home pre-dates both World Wars.

Calculations

The rates are quite favourable in Alberta right now. A quick comparison of the best Edmonton mortgage rates, reveal a low interest rate of 3.09%. This translates to monthly mortgage payments of $1,105. And since there is barely any Land Transfer Tax in Edmonton, the fee is only $93.

*5-year fixed rate over a 25-year amortization with 20% down payment, as of August 11, 2011

RH Index

The average MLS sale price is $365,648 thus far in 2011, but Edmonton sits $36,000 below it. However, CMHC is expecting a very moderate 2.4% average sale price increase by 2012. This particular property fits our “Big Mac home” criteria perfectly. Now, let’s apply our RH Index to gauge the value of this home, against our standard “Big Mac Home” of $390,163.3

The implied purchasing power parity is $1.35 to $1.

We divided the “Big Mac Home” price ($390,163) by the Edmonton “Big Mac Home” ($289,000).

This means that you are getting “more house” for your dollar in Edmonton.

It appears Edmonton’s housing market has great deals where you can really stretch your dollar on housing. Talk to Edmonton mortgage brokers to learn more about your financing options.

Sources

1 Big Mac Index: http://www.economist.com/node/8649005?story_id=E1_RGQJDDV

2CMHC: http://www.cmhc-schl.gc.ca/odpub/esub/64343/64343_2011_B01.pdf?fr=1312341385021

3 $390,163 – 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/


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