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Improving Affordability Trends in Calgary March 29, 2009

Posted by DustinRJay in Calgary real estate, carrying costs, valuation models.
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Calgary housing affordability is now better than long term averages.  This is due to three reasons:

  • growth in household income
  • falling interest rates and a
  • correction in the housing market.

The following chart also illustrates how housing affordability is much better than the early 1980’s real estate cycle and more similar to  the early 1990’s real estate cycle.  One factor for improving affordability is interest rates are at record lows (but could go lower).  One should always budget for a rise in interest rates to ensure they are not exposed to any excessive risks.

Improving Affordability Trends In Calgary

[click above for larger view]

Data: Statistics Canada, Alberta Finance, Bank of Canada, CREB, Bob Truman – First Place Realty

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1. BearClaw - March 30, 2009

Radley,

Looks like you have become popular on the Alberta Bubble blog! Congratulations!

Can you list out the data you use? What interest rate? Which amortization and how much down?

The last couple of data points in the chart where affordability improves, I am assuming is mostly due to interest rates. Could you list the most recent values for income, house price and interest rate?

I am asking because I am suprised how the early 80s spike dwarfs the recent bubble.

2. radley77 - March 30, 2009

Data used:
Old Criteria House Prices (sources: CREB, Bob Truman)
Household Income (sources: Statistics Canada Table 202-0403, Alberta Finance Alberta average hourly wage rate to extrapolate to 2009)
CPI inflation: (source: Statistics Canada)
Interest Rates: (source: Bank of Canada 5 year mortgage rates)
Amortization period: 25 years constant over entire evaluation period
Amount Down: Fully amortized over entire evaluation period

This analysis was done primarily as a relative metric to determine the potential for household liquidity problems as well as determine barriers to first time home buyers.

The last couple data points improvement in affordability is primarily due to interest rates dropping 1.2% since December 2008. I believe the early 80’s spike in poor affordability conditions is MUCH worse than current conditions.

The bubble blog is a good narrative, it really drives home the point of why everyone should have a capital cushion. For the most part, I think engineers grow up with a degree of skepticism about everything (probably greater than average Joe). This is driven by working in industries that are very cyclical, as oil and gas industry has had it’s ups and downs over the last century, and experienced first hand the effect of the deteriorating technology industry after the tech industry slowed down after 2001. I grew up on a farm, so have seen the effects of drought, bug infestations, and market prices can have on your business. The story is similar to the Ant and Grasshopper from Aesop’s fables. I’m not sure if the point of her story was that the bubble blog believes I am naive, or an excessive risk-taker. In any case, I think I have done a greater than adequate research on the market and personal budget and came in with a conservative viewpoint on the economy with a possible US recession in late 2007, and possible Canadian recession in early 2008, since September 2008 obviously deteriorated worse than expected. But since last year, on a personal level, have experienced strong growth in our household balance sheet due to a variety of reasons that leaves us in a better than expected position to handle the worse than expected recession. I am glad however if the example Alberta bubble blog illustrates encourages people to take a defensive approach to examining their future balance sheets if they are potentially looking at buying, as this would help to support long term economic growth.

3. Glenn - March 30, 2009

Wonder how the chart would look if interest rates were applied at the typical long term average?

4. BearClaw - March 30, 2009

So for family income did are you using the following numbers?

2006 $77,800
2007 $82,468 6.0% hourly rate increase
2008 $87,169 5.7% hourly rate increase
2009 $91,789 5.3% hourly rate increase

5. radley77 - March 30, 2009

In 2006, according to Statistics Canada average household income was in 2006 dollars $84,600 for “All Family Units” (as per Statistics Canada Table 202-0403) and then extrapolated using the numbers that you listed.

6. BearClaw - March 30, 2009

thanks!

Is there a stat indicating how many people are working within a family? I would guess there are more two income families now than in the early 80s.

Also saving for a similar % downpayment is more difficult today, with low interest rates and high house prices.

However, It is clear that the 20% interest rates had the biggst impact on affordibility in the last boom.

7. radley77 - March 30, 2009

I think it’s pretty complex to estimate the demographic changes that underly the average household income. This number includes everything from single moms to elderly couples to baby boomer effects and one and dual income or more families.

Since 1976, one earner married families real income has increased by ~25% whereas all family units real income has increased 21%. This indicates to me that housing relative affordability for single earner families is roughly equivalent to the trends on the above chart for average household affordability.

I think in a low interest rate environment where safe assets have lower yields it can make sense to reduce the % downpayment. I could see it being a good policy to reduce downpayment requirements to some multiple of rent (maybe 2 times annual rent equivalent) so that there are not huge economic barriers for families to own.

8. Newt - March 31, 2009

Good job on the graph. I think that there are a few fundamental errors on it though.

First, lay-offs are occurring, salary freezes are in place at most major corporations, and salary reductions are occurring. I think it is safe to say that a 0% hourly wage increase is likely from 2008 to 2009 – maybe even a small percent decrease.
Second, todays interest rate really doesn’t give an indication of “affordability”. It will surely not stay this low for the long term. I am curious to see how your graph would look with 2008 wages frozen and an average interest rate – maybe 30 year average, but a 10 year should also do the trick – you could even do a 3 year running average. This will give a better indication of “affordability”.

9. Calgary Housing Affordability Update « Calgary Real Estate Market Blog - November 22, 2009

[…] I think the affordability metric is one indicator of the relative value of housing (particularly in Canada) as Canada has not had the same volumes of subprime lending.  Studies have shown that regions within the US with higher amounts of subprime lending have fallen faster and harder than regions that don’t have the same amount of subprime lending (even if prices are relatively elevated in both cases).   In regions with high amounts of subprime lending, I believe it is more important to pay attention to price to income instead of affordability.  I also believe that affordability is a leading indicator for future mortgage arrears.  When affordability becomes stretched, it’s likely that mortgage arrears will increase over the following years.   The Calgary real estate correction in 1982 was predicated on extremely poor levels of affordability as noted in a previous post. […]

10. james - March 31, 2010

to Newt:

via stats can
http://www40.statcan.gc.ca/l01/cst01/labr79-eng.htm

2005 2006 2007 2008 2009
Canada 737.29 755.48 788.06 810.52 822.42
percent increase 2.5% 4.3% 2.9% 1.5%

clearly not 0%

Though I have to agree that the current interest rates have artificially depressed the current affordability index.

11. hermes kelly bag - July 5, 2010

[…] I think the affordability metric is one indicator of the relative value of housing (particularly in Canada) as Canada has not had the same volumes of subprime lending. Studies have shown that regions within the US with higher amounts of subprime lending have fallen faster and harder than regions that don’t have the same amount of subprime lending (even if prices are relatively elevated in both cases). In regions with high amounts of subprime lending, I believe it is more important to pay attention to price to income instead of affordability. I also believe that affordability is a leading indicator for future mortgage arrears. When affordability becomes stretched, it’s likely that mortgage arrears will increase over the following years. The Calgary real estate correction in 1982 was predicated on extremely poor levels of affordability as noted in a previous post. […]

12. Knoxville Real Estate - August 14, 2010

What are the documents needed in acquiring a property in Knoxville? I am a Canadian citizen and my application for immigration is still pending. Will this be a problem? Thank you and more power to you.

13. Jim - September 8, 2010

Montgomery Triangle Calgary

After reading about NotaBle restaurant and this Montgomery Triangle:: I had to give them a shot. Ate dinner at NotaBle last night, it was Excellent. Drove around Montgomery looking for the Montgomery Triangle. Finally found this beautiful little area next to the Bow River and the Shouldice Athletic facility, not many Montgomery people do not refer to the Triangle too much. It is an Excellent area to own some real estate. Very few little homes on big 50 foot lots left. Almost all high end side by side duplexs. Great area!! and Great Restaurant!!


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