Friday, December 12, 2008

Case Shiller House Price Index - Canada Style

In many real estate markets across the country, the change in real estate prices is represented by the 'average' or 'median' price. Although an average and median do represent some things about the sales of homes they can pose problems for those trying to analyze what is really going on. One of these challenges is that average and median prices can change dramatically if the mix of sales changes to favour the low end of high end of the housing market.

Take this situation for example:

In October, 5 homes sell, priced at $200, $250, $300, $450, and $900.
Average price = (200 + 250 + 300 + 450 + 900) / 5 = Average Price is $420.
Median price is $300 which of course tells a completely different story.

In November, 4 homes sell priced at $175, $200, $350, and $425.
Average price = (175 + 200 + 350 + 425) / 4 = Average price is $287.5
Median price = (200 + 350) / 2 = Median is $275

The determination that I have made is that average prices and median prices have some value to inform us of price changes but they are highly volatile based on the number of and mix of sales. If there are a large portion of high end or low end sales those numbers can really be thrown off. This is why some real estate boards (REBGV and FVREB) use a benchmark which adjusts prices for quality so 2000 suare foot, 4 bedroom homes are compared against other 2000 square foot, 4 bedroom homes. These benchmarks eliminate a lot of problems with averages and medians.

An even better method of measuring prices is the repeat sales method which is called the Case Shiller Home Price Index in the United States. There is a national index, 20 city index, 10 city index, and separate indexes for 20 large metro areas in the United States.

On December 2nd, 2008 Canada got our own repeat sales house price index as National Bank Financial Group and Teranet ... announced the launch of the Teranet - National Bank House Price Index(TM), the first independent representation of the rate of change of Canadian single-family home prices based on the "repeat sale methodology."

You can read more about this methodology here. Essentially this methodology is a true apples to apples comparison of homes. The major issue with the repeat sales method is that there is a time lag to get the data out to the public and this timelinesss is an important factor when making large financial decisions such as a purchase or sale of a home or investment. Additionally, the current index is only available for six cities across Canada and if you are trying to follow other markets I guess you are left to do your own comparisons.

I am glad that someone with the appropriate resources has undertaken the task of establshing a repeat sales methodology house price index for major Canadian centres. It will allow observers to have a more accurate view on what is actually happening to house prices.

For now those prices are falling in Vancouver, Calgary, Toronto, and Halifax.


mohican said...

As far as these different measurement techniques I would rate them at:

Average = Poor
Median = Fair
Benchmark = Better
Repeat Sales = Best

Warren said...

I tend to agree mohican, although it would be nice to see them all compared together on the same graph.

Average isn't great for price alone, but compared to benchmark or repeat it shows the types of homes that are actually being bought and sold in the market.

M- said...

That's great to hear that there's a Case-Shiller type of house price index getting started here. The more data the better!

I'm looking forward to their next update to the numbers, to get analysis more up-to-date than September.

I wonder if they'll get a futures market going for the housing index here like they do down in the US?

korean said...

Interesting that this index still shows a positive YoY for Sept whereas the REBGV Benchmark was down for houses and apartments and only up slightly for TH's. I think the index covers a larger area than the REBGV and may be picking up areas that didn't drop as much...

JinMalm said...

Benchmark and HPI track each other pretty well. So much for the conspiracy theories.

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