September 20, 2016
What's happening to home prices and where are they headed?
REALTORS® are asked these questions every day by clients trying to understand whether it’s a good time to buy or sell.
To ensure you have the most accurate picture of home price trends, we developed the MLS® Home Price Index (MLS® HPI) together with the Fraser Valley, Calgary, Toronto, and Montreal real estate boards and the Canadian Real Estate Association. We contracted with a third party, Altus Group, to build and maintain the MLS® HPI.
The MLS® HPI is the best and purest way to gauge home price trends. It takes housing quality into account, such as housing category, location, number of rooms, square-footage, etc., in a way that no other price-tracking method does.
What makes the HPI a better measure?
The MLS® HPI tracks changes of "typical" homes and excludes the extreme high-end and low-end properties.
"The key advantage is the MLS HPI® isn't skewed by a changing mix of properties sold in a given month," says Robyn Adamache, principal, market analysis, Canada Mortgage and Housing Corporation.
"We may get a month like August where the average price takes a huge drop because high-priced home sales have stalled. But this may be a one-time event, just a blip in the data," says Adamache.
"When it comes to monitoring the market and measuring trends, MLS® HPI benchmark prices are a far better measure."
The MLS® HPI is conceptually similar to the Consumer Price Index (CPI), which tracks inflation by measuring the value of a “basket” of commonly purchased goods and services.
The MLS® HPI uses a sophisticated statistical model to estimates home prices based on their “basket” of housing features. Those attributes remain constant over time, making the MLS® HPI the best tool for “apples-to-apples” historical comparisons.
Why use benchmark prices over averages or medians?
Average price are calculated by adding the dollar value of all sales in an area and dividing this number by the number of homes sold.
Average prices are easy to compile and understand.
"The downside is the average price is often volatile due to the changing mix of homes sold in a given month or time period," says Helmut Pastrick, Central 1 Credit Union chief economist.
"For example in August 2016, the average price for detached homes plunged because of fewer luxury home sales due to the foreign buyers tax."
Median prices are calculated by listing all sales in an area from the lowest price to the highest price, and choosing the midpoint.
Like the average price, the median price is easy to compile and understand.
"The downside is the median price is also skewed by the changing mix of homes sold," says Pastrick.