Housing Purchase Power Parity: Victoria

Alyssa Furtado
by Alyssa Furtado August 11, 2011 / No Comments

Almost a hundred years ago, a brilliant Swedish professor helped develop a theory for economics known as Purchase Power Parity (PPP). This theory helps us understand the value of goods and what they cost across various currencies – with the exchange rate factored in. The most modern version of this theory is the Big Mac Index1 which uses the price of Big Mac sandwiches across different countries to determine the value of that country’s currency, measured against the exchange rate. This value, when compared with the exchange rate reveals whether it was under or over-valued. If it is lower, then the first currency is under-valued compared with the second; if it is higher, then the first currency is over-valued.

In this blog series, we’ve developed what we call, the “RH Index”, which is like a cousin to the Big Mac Index. Rather than measure the common Big Mac price in different countries, we’ll be using the “common” house price of two-story, centrally-located, three-bedroom, two-bathroom homes across different housing markets. With our newly created theory, we’ll determine whether the value of these housing markets are over-valued or under-valued, when compared to our average “Big Mac home” price of $390,1632. It’s not perfect, but it’s sufficient enough to have a little fun.

The real estate market in British Columbia has been receiving a lot of buzz recently due to sky rocketing property prices. However, the city of Victoria, which is only 100km from Vancouver, is actually exhibiting stabilizing market conditions. According to CMHC, they believe average resale prices will stabilize in 2011 and 2012. Housing starts are actually down six per cent from last year3.

MLS®: 297343, $665,000

Housing Purchase Parity

Notes

This charming home was built in 1914 and is just under 2000 square feet. If the price seems a little low for B.C., it’s because it’s being marketed as a “fixer-upper”.

Calculations

By looking at current Victoria mortgage rates, we can determine what the affordability of this property might look like. The best rate available is 3.59% which works out to $2,681/month. The Land Transfer tax in Victoria works out to $11,300.

*5-year fixed rate over a 25-year amortization with 20% down payment, as of July 29, 2011

RH Index

The “Big Mac home” price is $390,163. Victoria, although not as heavily priced as its neighbour to the east, Vancouver, is still a strong market – with forecasted gains of nine per cent this year and a further eight per cent next year3.

How similar is this home when compared to average “Big Mac Home” price? What is the value of the home’s price tag versus the average?

The implied Purchase Power Parity is $0.59 to $1.

We divided $390,163 by $665,000 (the “Big Mac Home” in Victoria that met our criteria).

This means that you are getting almost “half the house” for your dollar when compared to the Canadian average. Obviously the housing market in Victoria, much like most of British Columbia, is over-valued.

To understand more about mortgages and mortgage rates, it is best to seek out Victoria mortgage brokers for advice. They have great expertise in financial housing options and will be able to assist you in with any queries you may have.

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 report: http://www.cmhc-schl.gc.ca/odpub/esub/64367/64367_2011_B01.pdf?fr=1312335736277


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