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Calgary Resale House Price Model April 22, 2009

Posted by DustinRJay in Calgary real estate, short term real estate trends, Uncategorized.
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The following graphs illustrate the historical relationship between absorption rate and house price changes in Calgary.  As the absorption rate decreases, demand exceeds supply, and house prices rise.  When the absorption rate is high, supply exceeds demand and house prices fall.  While I do not believe this metric is useful for determining long term price point, I do think it is useful for determing the near term price trends.

Calgary Absorption Rate Correlation

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Calgary Resale House Price Model

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Recent history indicates that an annual absorption rate of 4 would be a market that is roughly balanced.  In 2008, Calgary had record amounts of resale inventory and these inventory levels have dropped in 2009.  Also, sales dropped dramatically following the credit spread crisis, but have since improved on a seasonally adjusted basis.   If the current inventory glut continues to decline at it’s current annual rate, and sales stay flat seasonally adjusted, it is possible that the Calgary housing market will bottom in December 2009 after falling further in autumn.  I think there are upside risks and downside risks to this forecast.  I believe it is prudent for all market participants to err on the side of caution both when formulating business plans and household budgeting.  It’s probably also worth noting that house prices are likely to increase by only in the zero to very small single digits for a number of years after bottoming, so there is no rush even if you are trying to time the bottom.

Data:  Bob Truman – First Place Realty

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? 



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

Terrain of Calgary Real Estate Valuation – Price To Rent Ratios January 16, 2008

Posted by DustinRJay in rental yields, valuation models.
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In the previous post, I discussed how Calgary rental yields are less than many safe investments like bonds.  I was interested in how the price to rent ratio compared in a historical perspective and what were the valuations like compared to previous real estate cycles. 

A price to rent ratio is similar to the price to earnings concept which is borrowed from the equity markets.  The idea is that house prices can be compared against the cash flow that can be generated from the property.  Ergo, the higher the house price in comparison to the rent, the poorer the value of the asset.

RBC published a report in 2005 called “House Valuations Across Major Cities.”  At the time of the report, it stated that price to earnings ratios for Calgary real estate had pushed “significantly beyond” late 1980’s levels.

The following is a graph of how price to rent ratios compare in Calgary.  As you can see, rental yields are an underlying fundamental of house prices up until 1998, when house prices started increasing exponentially, but the trend for the rent index stayed at roughly the same as inflation.

 Price to Rent Ratios - Terrain of Calgary Real Estate Valuation

The current valuations are roughly double the long term price to rent ratio.  This information dovetails with my previous blog entry wherein I came up with a rental yield of 3.1% for Calgary house prices which is less than safe investments like bonds.  A comparison against the long run price to rent ratio and the current valuations indicates that a more rational valuation would be 6.2% (slightly above low risk assets like bonds).

Therefore, caution may be warranted if buying, as house prices are roughly double traditional valuations.