Anyway, the RSPI likely just needs time to catch on – the index was only announced earlier this month. One thing that could help get the ball rolling is when a financial group announces they have developed futures contracts or other derivatives to trade off the index – as was done for the Case/Shiller house price index in the U.S. market. Such derivatives open the door to hedging house prices, which was a good idea in the U.S. where house prices are now down nearly 20% over the year — see Trading housing futures post of Aug. 30, 2006.

While it appears the RSPI is a better alternative than the average-price measure presently used in Canada, some readers did not seem convinced it had solved all the problems. Paul wrote:

“… if you’re looking at repeat sales, what’s the chance that these houses were bought, renovated and then flipped for a higher price? This would skew prices higher than normal.”

I put this question to the creators of the index and got this response back from Simon Côté, Managing Director of Property Derivatives at National Bank of Canada:

“I will spare you all the detailed methodology (you can download the methodology from our website). Basically, the contribution of each transaction pair to the index value is not equal. The weighting of a given pair depends on how close its annual growth rate is to the average annual growth rate. The price of a house that has been subject to significant renovations will display an annual growth rate that is significantly different from the average, and its contribution to the index value will be significantly down weighted.
Moreover, if an asset property type changes between the first and the second transaction of a pair, the pair is rejected.”

Blogger Michael James on Money wrote about the RSPI that:

“… it does shrink the sample space considerably. Also, any method that looks only at sales can give skewed results. For example, if a period of time has mostly low-end houses sold, then looking at sales gives little information about the change in value of high-end houses. The best metric will be one that attempts to value all houses.”

The reply from National Bank was:

“Sample size: we screen ALL transactions registered. The actual pair count is published on the website (bottom part of the charts). There is more than enough data for the estimation to be statistically robust. A sample too small would result in high short term volatility in the index value. Sales vs. appraisals: we still think actual sales data is more representative than any appraising method (especially in periods of low trading activity). Sometime in the future, we may be able to publish index values for different tiers, high, medium and low price houses, but our first tests show very little difference between the three in terms of annual growth rate.”

But the year-over-year rate is decelerating in all six cities. The Teranet-National Bank website has some interesting graphs of the trends. It wouldn’t be surprising to see the rate of change get close to zero in months ahead given momentum in the series. And economic conditions are still deteriorating.

Calgary and Vancouver have been slowing down since late 2006 when they peaked at 40% and 25% year-over-year gains, respectively. For these cities, late 2006 and 2007 would have been opportune times to sell and switch to renting (or move to another city) — see Rent or buy? (22 Aug., 2006). The other four cities are slowing down from intermediate peaks near 9%, established in early 2008 or so.

Cumulative price gains over past years remain high. As can be seen in Table 2, house prices in Vancouver, Calgary and Montreal are still more than double what they were in June 1999. Ottawa and Halifax are up about 85%. Toronto, which has had the least volatility in prices of the cities, registers a 65% increase.

Table 1: Year-over-year house price changes (Oct. 2007 to Oct. 2008)
Vancouver 4.9%
Calgary -7%
Toronto 5.6%
Ottawa 5%
Montreal 6%
Halifax 5.5%

Table 2: Change in house prices since June, 1999
Vancouver 120%
Calgary 132%
Toronto 65%
Ottawa 86%
Montreal 106%
Halifax 84%

A new price index gets around the apples-to-oranges comparison and shows by how much CREA statistics miss the mark. The repeat-sale price index (RSPI), developed by Teranet Inc. and National Bank, says house prices are still above the level of a year ago (by 3.3%). For more detail on the RSPI, see the website maintained by Teranet Inc. and National Bank (also shows price changes at the city level).

The RSPI approach is what’s used in the U.S. for the S&P/Case-Shiller and the Office of Federal Housing Enterprise Oversight (OFHEO) indexes. And now that Canada has the same approach, comparisons with the U.S. are more valid (the S&P/Case-Shiller index is down almost 20% year-over-year, showing how much worse things are in the U.S. at present).

Why does CREA data show such a big drop in Canada? House sales have dropped off considerably in the high-priced province of B.C. The result is a lower average price for houses. But this is not a price decline: it’s a change in the mix of houses sold. CREA has undertaken to adjust its data, but the RSPI will remain the less biased measure and should be heard from a lot more in the future.