Canadians Develop a Better Way to Track House Price Trends
The Canadian real estate industry says it has developed "the best and purest way of determining house price trends in the housing market."
The new MLS Home Price Index (HPI) will be used to replace the current method of providing average or median prices. The more accurate numbers will allow consumers and real estate professionals to identify price trends sooner, and allow for an "apples to apples" comparison of prices across the country. The measure will be a valuable tool for homeowners, real estate investors and those in the real estate industry.
The Canadian Real Estate Association (CREA), which took the lead in developing the HPI, says average house prices are often misinterpreted. They are affected by changes in the mix of homes sold and can swing dramatically from month-to-month, based on the types and prices of properties that sold in a given month, CREA says.
The new measure is calculated "using a sophisticated statistical model that is a hybrid of both the repeat sales and hedonic price approaches," says a news release from the Toronto Real Estate Board.
For those of us who have no idea what that means, here’s how it works. The HPI each month will provide two measurements. First is a price index. The HPI uses price values as of January 2005 as its base (reference) point. This level is set at 100 and works in a similar way to the Consumer Price Index. For example, in January 2012, Toronto’s composite HPI was 143.6. That means the composite price index rose by 43.6 per cent between January 2005 and January 2012. It was up by 0.28 per cent compared to December 2011 and up by 7.6 per cent compared to January 2011. Consumers can use the number to track price trends without worry of it being skewed, for example, by increased sales of higher-priced homes in a particular month.
The HPI also sets a series of benchmark home prices for different housing types: single-family, one-storey, two-storey, townhouse and condominium apartments. The benchmarks take a set of attributes typical of that type of home in the area where it is located, and remain constant over time.
Among the attributes that go into calculating the HPI are:
- number of rooms above basement level
- number of bathrooms and half-bathrooms
- square footage for main and living areas
- whether it has a fireplace or finished basement
- lot size
- age of the property
- how the home is heated
- foundation, flooring, siding and roofing types
- waterfront or panoramic view if any
- whether it’s new or resale
- proximity to shopping, neighbourhood amenities, public transit
In 2008, the Teranet-National Bank House Price Index was introduced to address the problems presented by average and median prices. The new HPI is better than the Teranet Index, says CREA’s chief economist Gregory Klump, for two reasons. The Teranet index uses the repeat sale methodology, which compares the values of properties that have been sold at least twice. The two prices are used to measure the increase or decrease in property value between the two periods of measurement.
The problem with that, says Klump, is that it does not take into account renovations or improvements that may have been made to the property between the two sales. "And we know how much Canadians love to renovate," says Klump. The other issue is that the Teranet index data is "considered to be five months out of date" by the time it is issued, says Klump. The new HPI data will available almost immediately at the end of every month.
The HPI was developed by CREA with five major real estate boards in Montreal, Toronto, Calgary, Fraser Valley, B.C. and Vancouver. It was created by the Altus Group. They consulted with Statistics Canada, Canada Mortgage and Housing Corp., the Bank of Canada, Finance Canada and Central 1 Credit Unit, which all have endorsed the MLS HPI methodology.
Initially only the five boards are taking part in the new index, which Klump says represents more than 60 per cent of the Canadian real estate market. There are plans for eight more real estate boards to be added this year, and another eight boards next year. Klump says there is no accurate measurement of how many private and new home sales are not conducted through the MLS, but he estimates that 70 to 90 per cent of all Canadian home sales are tracked on the service.
"This new approach will provide clarity for the consumer and prove to be a major improvement over any other method to measure home prices and home price change available in the marketplace today," says Toronto Real Estate Board president Richard Silver.