Monday, March 9, 2009

A Tale of Two Cities

Calgary and Edmonton, two cities of similar sizes, linked together by geography, politics, and a healthy dislike of each other. In many ways it's inevitable they'd be compared.

One's a little bit more country, the other a little bit more rock 'n' roll... one's a little more white collar, the other a little more blue's sports teams win a lot of championships, the others, um, well, they wear a lot of red... but it's not all bad down South, after all, they have chinooks, so they do have something going for them! ;)

I kid, I kid. Calgary's a pretty good town.

Anyway, with two cities quite similar in demographics, geography and governance, they should provide an interesting comparison for home prices. So lets get on with it.

Edmonton/Calgary - Average Residential PricesAs you can see here, the actual price of homes in our cities have followed very similar patterns over the years. Though it should be noted Calgary has had higher prices over the last 25 years, we'll be touching on that later. Overall they track about the same, booming at the same time, declining at the same times. That really shouldn't surprise any anyone, their economies are very closely tied.

Here's a look at the same graph adjusted for inflation:

Edmonton/Calgary - Inflation Adjusted Average Residential PricesObviously just reaffirms the above. Also as we discussed in the prior entry, those that bought during at the peak of the boom during the late 70's-early 80's took about 25 years for the value of their homes to return to the price they paid for them when inflation is accounted for.

One interesting observation is that during that prior boom it was also Edmonton that started seeing prices decline before Calgary did. Coincidentally, the same was also true during the current bubble.

In the comments discussion in the last entry, someone brought up a similar inflation adjusted graph done on a Calgary specific blog about a year ago. They conversation concerned the best-fit line in that graph, finding annual 1.2% growth above inflation in Calgary vs. my using a line showing 1.8% growth above inflation in Edmonton.

Just to clarify, those two plots were not of the same thing, and should not be compared as such. His was a purely statistical measure, whereas mine was looking more to mimic a long-term trend and was based more on intuition. Both have their strengths, though a statistician would probably argue that my number might as well have been pulled from my rear-end.

In any case, just so we can compare apples-to-apples I'll do best-fit trendlines for both cities based on current numbers and 2009 dollars.

Calgary Inflation Adjusted PricesThis is Calgary, 1973-current. In red is the inflation adjusted price, and in black a best-fit exponential trendline. According to this, over that period Calgary experienced a 1.33% annual yield beyond inflation (also perhaps of interest, it tells us the residential average has about $100,00 to drop before it reaches the long term trend).

Edmonton Inflation Adjusted PricesHere is the same graph for Edmonton, over the same period. According to that, Edmonton only experienced 0.6% annual growth beyond inflation... less then half what Calgary did, and quite low in general. Though, as mentioned in the Calgary blog, not unprecedented, as mentioned there over 345 years the actual growth above inflation there was a mere 0.2% annually.

One issue with this kind of measure is that it can change significantly just by adjusting the period. To give you an example of that, and since I have data for Edmonton going back to '62, here is a graph of prices and both the '73-current trendline, and a '62-current trendline.

Edmonton Trendline ComparisonHere we can easily see the contrast. The '73-current line is almost flat, whereas the '62-current line shows appears much steeper (relatively speaking), coming in with 1.45% annual growth above inflation. It's really quite a significant difference.

This of course begs the question, which one is right?

The answer is... who knows, they're just numbers.

As any good statistician could tell you, you can probably make the numbers tell you whatever you want to hear. The numbers are a conversation piece and you can certainly make an argument with them, but going forward they aren't proof of anything.

Thus, I still kind of like my old arbitrary graph here...

Edmonton assuming 1.8% annual growthPretty, ain't it?! And as different as the measures are, they all seem to be telling us that residential average should be heading toward the $200,000 mark.

Anywho, so another topic bandied around in the prior entries discussion was the ratio of prices between Edmonton and Calgary. As noted earlier, while the two cities follow very similar patterns, Calgary has experienced consistently higher prices for a good while.

Calgary/Edmonton Price RatioHere we see the Calgary price relative to the Edmonton price since 1973 (Edmonton's prices =100%, Calgary's price plotted).

Until the early 80's the two were pretty close, then as the oil boom ended, as we noted earlier, Edmonton declined faster and we saw the first extended separation, but eventually the bust hit Calgary prices as well and they were again about even between the two for a few years.

After 1985 though Calgary pulled ahead, and has stayed there ever since. Trended about 20% above through the mid-to-late '90's when it shot up to about +40% (getting as high as +51% at times)... but then cooled back down into the 20's (but did briefly spike back to +51% )... and has since cooled further, and is not back at levels not seen since the mid-90's.

Lately we've been seeing Calgary at around +15-to-20% above Edmonton in the last few months. Depending on the period, the overall average is a bit different. If you include everything right back to '73, Calgary is 21% higher (median 20%)... but over the last 20 years, they have been 27% higher (median 26%).

So, to make a long story short... I'd say Calgary prices we should generally expect be about 20-25% higher on any given month.

On a side note, this is actually a bit out of line with affordability, while Calgary does have a higher median household income, it's only about a 10% difference currently. So we may see the margin narrow a bit in the years to come.

Oh yeah, and some more good news for our friends from the South. I heard they're planning on remodelling the Saddledome... it'll be perfect in every way... except for one thing... the seats will still face the ice!

Enjoy your Monday!