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Long Term Relationship Between Calgary House Prices and Alberta Economic Activity Diverge – Irrational Exuberance? February 24, 2008

Posted by DustinRJay in Calgary real estate, long term real estate trends.
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The price of houses is linked to the economic well-being of the region.  Recently, the Alberta economy has been extremely strong and Calgary house prices have increased tremendously. But the question remains, did house prices increase rationally in comparison to economic growth?

A comparison of house prices and GDP per capita show that they roughly track each other for 24 years and then sharply diverge.  This could imply that recent asset valuations of houses have been irrationally exuberant, and a more rational valuation of ~$300,000 would be approprate given the current level of economic acitivity.

 Long Term Relationship Between Calgary House Prices and Alberta Economic Activity Diverge - Irrational Exuberance? 

        

                   

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Comments»

1. crebb - February 25, 2008

Hey Rad, nice graphs as always. Pretty much quantifies and confirms the RE market. Unsustainable, unsupported by true economic fundamentals. It was all smoke and mirrors that realtors and such had used to make people buy homes over the last two years.

2. squid - February 25, 2008

great graph radley

3. squid - February 25, 2008

hey radley..rob from the contrarian blog used to post graphs like this ..tinyurl.com/2gzfqy realy shows whats happening of course he used the true staple the old criteria which tells the true story

4. squid - February 25, 2008

looking at your graph, i totally agree Calgary could support homes in the $290,000 range but unfortunately because of all the speculation i am afraid that when the prices start falling they will overshoot that range. my feelings are that prices for a year or two or at least till the excess inventory is worked through will fall to the $160-$180,000
mark as Calgarians not unlike our neighbours to the south are exhausted from this massive housing bubble. this bubble will definitely change the way that real estate will be transacted in future years, the demise of the realtor is a given, the mils is a very good system and i would predict its survival, one thing for sure with the Internet we are all much better educated as to what is happening with both housing prices and sales, companies like zillow will expand into Canada along with others, and with any hope housing will never become a gambling object again..thanks for your work

5. squid - February 25, 2008

definetly think calgary can support home prices of $290,000 thats right where they should be, unfortunatly the realtors and msm have driven prices sky high, speculation has damaged calgary in a huge way, young people are relocting to different parts of canada now,unlike last time realtors and the msm will be the downfall of our great city,when prices start there decent it is my belief that they will overshoot the $290,000 range and settle around $180,000 for a year or two or at least until the excess inventory can be worked through, then return to there proper level.

6. Miguelito - February 26, 2008

Well, just to play skeptic, the 2007 gdp-per-capita number is estimated based on recent trends and not on 2007 data. How accurate is it?

Not that it’s not unreasonable, however. Household income certainly hasn’t increased at the same rate as housing prices.

7. Vladimir Levin - February 26, 2008

Hi, I am curious – Might it be possible to produce a similar graph for markets such as Toronto and Vancouver? These markets have had really expensive real estate for a long time, but I wonder if those prices have been in keeping with GDP growth or if at some point in the past they to had a transition where the prices jumped relative to gdp.

8. radley77 - February 27, 2008

I definitely would be interested in how it compares against Toronto and Vancouver as well. Mohican, over at the Langley Financial Planning blog recently did an “Uberpost” regarding the Vancouver real estate market where he has done analysis in terms or price to rent ratios and affordability measures.

Here is a Australian paper regarding a comparison one economist did wherein he came up with an index of house prices divided by GDP per capita (see Figure 1 A):
http://cama.anu.edu.au/macroworkshop/Mark%20Crosby.pdf

Also, regarding how accurate 2007 GDP data is… the population was based on data from Statistics Canada and GDP was estimated based on average of growth over the 4 previous years. All said, I’d estimate the range of error of GDP per capita to be +/- 5%.

9. Vladimir Levin - March 1, 2008

Thanks for the link to the Australian research paper. They propose an interesting model. I had trouble with the details of the paper on a quick read-through, but maybe I will understand it a bit better if I try to look at it carefully over the weekend. The paper mentions interest rates as one of the parameters and it definitely strikes me as true that the extremely low interest rates coupled with the very strong economy driven by oil prices is the dynamic that has propelled Calgary real estate prices to such highs. My gut feeling is that this dynamic will not fundamentally change within the next few years, so while prices may drop to some extent, I doubt they’ll fall to pre-2006 levels in the “forseeable” future… Just my 2 cents. Who knows what will really happen!

10. hubby - September 22, 2008

enlarge the graph too

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