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Carrying Costs for Calgary Houses – Highest Since the 1980’s January 27, 2008

Posted by DustinRJay in carrying costs.
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One macroeconomic factor affecting real estate is interest rates.  As interest rates go down, house prices should go up and vice versa.

Here is a summary of  conclusions that I have made regarding the graph below:

  • Historical annual carrying costs above ~$17,500 in 2007 dollars appear to be unsustainable
  • Recessions often follow peaks in the housing cycle (as is currently being exhibited in the United States)
  • Upward trending house prices from 1997 to 2005 is rational due to decreasing interest rates
  • It is unlikely for there to be interest rate relief in the magnitude necessary to bring carrying costs into sustainable territory
  • Interest rates are still relatively low in a historic sense

Carrying Costs for Calgary House Prices

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Comments»

1. mohican - January 28, 2008

Fantastic analysis radley.

How have you calculated carrying costs? Interest, taxes, maintenance, depreciation?

2. radley77 - January 28, 2008

Hey there mohican. I enjoyed reading your Vancouver real estate uberpost the other day! I was curious what is your work background?

The carrying costs just included the interest that would be paid to the bank (5 year conventional mortgage rates times house price).

3. mohican - January 28, 2008

Okay,

That is what I thought. I did a similar chart – included in the “Uberpost” which compared mortgage payments to rents. I will use your chart as inspiration for a new one based on long term home prices.

I have worked for the past 3 years as a Financial Planner at a major brokerage firm and the previous 7 years I was in the telecommunications field.

Cheers.

4. mohican - January 28, 2008

I thought you might find this interesting.

I did simlar analysis for the Vancouver Benchmark – adjusted for inflation – and I found the median carrying cost from 1975 to 2007 to be $33,200 / year. It ranges from a low of $25,550 in 2003 to a high of $104,300 in 1981. It is currently $46,260.

Did you use median prices or the benchmarks available here?

http://cuer.sauder.ubc.ca/cma/index.html

5. radley77 - January 28, 2008

Thanks for the link to the Royal LePage Calgary housing price index.

I used the ‘old criteria’ average price that the Calgary Real Estate Board had tracked from 1973 to 2007. I had been looking for a hedonic regression set for awhile. Unfortunately, the 2006-2007 data is missing from the R.L. housing price index… GRRRRR.

6. Newcomer - January 29, 2008

Love the graph! Being in Vancouver, I’m delighted to hear Mohican has been inspired by it.

7. Mike West - February 5, 2008

Hi radley77!… thanks for the analysis! It’s very interesting.
1976 to 1983 was really a painful period in Calgary considering the high carrying costs were for houses averaging about 225k in value!

8. Reading Tea Leaves - Predicting Canadian Recessions Using Financial Variables « Calgary Real Estate Market Blog - February 6, 2008

[…] cycle in Calgary.  As carrying costs are the highest since previous housing bubbles (see this post), it is useful to estimate the probability of a recession as a tool in forecasting the peak in the […]


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