Purchase power parity (PPP) is a theory in the field of economics which measures the value of goods based on different currencies, factoring in the exchange rates. The concept is based on the “law of one price” where identical goods should have the same price in different markets. The Big Mac Index is a clever derivative of PPP, since Big Mac hamburgers represent a common good with very little variation across countries. The Big Mac PPP is used to measure the value of a particular currency by factoring in the exchange rate to determine if it is over or under-valued.1
The Ratehub.ca derivative of the Big Mac Index measures “common houses” across different Canadian housing markets. For the property to meet our criteria to be considered a “Big Mac Home” (i.e. the common home) it must be a detached, two-story, three-bedroom, two-bathroom house. We call our theory, the RH Index.
We take our RH Index to the city of mosquitoes and wind – Winnipeg, Manitoba.
MLS®: 1113607, $249,500
This home is located in downtown west Winnipeg and is a generous 1500 square feet. The property survived the Great Depression and is currently surviving yet another difficult economic time.
We can use the Ratehub.ca mortgage payment calculator to determine this property’s affordability. Looking at the best mortgage rates in Winnipeg reveals that you can obtain a fixed rate at 3.49%, which equates to only $995 in monthly mortgage payments. The Winnipeg Land Transfer Tax amounts to $2,640.
*5-year fixed rate over a 25-year amortization with a 20% down payment, as of August 17, 2011
2010 was a good year for total housing starts in Winnipeg as it increased from 2009 levels by 60%. The residential MLS sales price has steadily been increasing since 2003, virtually doubling in that seven year time span.2 The price of our standard “Big Mac Home” is $390,163.3 Let’s put our RH Index to use and compare these two homes.
The implied purchasing power parity is $1.56 to $1.
We divided $390,163 (the standard Big Mac home price) by $249,500 (the Winnipeg Big Mac Home).
This means that you get extra bang for your buck in Winnipeg. Purchasing a home here means you get one and half times “more house” for your dollar. We can conclude that housing market in Winnipeg is highly under-valued.
To find great deals in this market, use Winnipeg mortgage brokers to solve your financing needs.
1 Big Mac Index: http://www.economist.com/node/8649005?story_id=E1_RGQJDDV
3 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/