By: Larry MacDonald
Canadians think house prices are tumbling in Canada thanks to Canadian Real Estate Association (CREA) reports that say prices have dropped 10% over the year. But it’s generally recognized their methodology is flawed: CREA compares average prices between two periods even though the composition of houses sold in the two periods can be quite different in terms of type, dwelling size, quality, etc.
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.
10 Responses to “ The myth of plunging house prices ”
Looking at houses with repeat sales is probably better than just average sales, but 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.
By Michael James on Dec 9, 2008
A very pertinent post! Just checked my neighbourhood in Ottawa and prices seem to be up from the last time I checked 8 months ago. There appears to be a me-too desire on the part of many to say how Canada is following the US down the real estate slide but if there was never a boom in some places, why should there be a bust now?
By CanadianInvestor on Dec 10, 2008
okay, i’ll ask the obvious question: 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 imo.
By paul on Dec 10, 2008
Paul
Good point. Hopefully the index developers adjusted for it or ascertained that it was snall. I’m asking them about it and hope to post about it soon.
By Larry MacDonald on Dec 10, 2008
Michael J,
True, the sample will be smaller. I’m asking the developer about these and other issues and hope to report back in a post.
LM
By Larry MacDonald on Dec 10, 2008