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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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12 comments

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? 

        

                   

Long Term Trends in Calgary Real Estate January 13, 2008

Posted by DustinRJay in long term real estate trends.
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45 comments

House prices have increased dramatically in the past few years.  For people looking to buy Calgary real estate in the near future, it is worthwhile to examine whether or not the current valuations are justified and what is the upside potential or downside risks.  If there is upside potential, how can one capitalize on it, and if there are downside risks how can one hedge against it?

From 1973 – 2007, house prices in Calgary have appreciated at 1.2%/year above inflation (not a hedonic regression).  However, over the last 6 years house prices have nearly doubled. 

This blog attempts to understand whether the increase has been substantiated by underlying rental yields, higher incomes, or lower carrying costs.  In addition, this blog will examine value investing approaches to quantify Calgary house prices.

The following is a summary of the peaks, troughs and recovery times for previous real estate cycles in Calgary (graph is shown below):

  • Peak: 1981 – $234,000 (~21 years to recover)
  • Trough: 1984 – $125,000
  • Peak: 1990 – $192,000 (~8 years to recover)
  • Trough: 1995 – $159,000

Calgary Inflation Adjusted House Prices 

Here are two interesting indexes to compare long term trends in Calgary real estate against:

The New York Times article states:  “Between 1628 and 1973 (the period of Eichholtz’s original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, “Real home prices did roughly double, but took nearly 350 years to do so.””

 In summary, recent house appreciation in Calgary is much greater than the long term real estate trends.  For long term trends, house appreciation of 1.2%/year for Calgary seems reasonable.  Also, house prices tend to revert to mean.  Caution may be warranted if buying, as house prices are approximately $150,000 more than the long term trend.