By: Larry MacDonald
In my column, Wanted: Better House-Price Indexes, I questioned the data in a June 15 press release from the Canadian Real Estate Association (CREA). It announced a 16.4% jump in house prices over the five months ending May 30, to a record-level average price of $319,757. I said this seemed quite incongruous with the unemployment rate rising to an 11-year high of 8.4% in May and two other indexes of housing prices showing ongoing declines. CREA’s indexes based on average prices were seriously flawed and should be replaced by less distorted measures, I argued.
A reader asked: “Is this just a case of CREA trying to shine things up so agents might see a pick up in business?” I wondered the same thing as I wrote the piece. I can’t really say for sure, but I can see how dramatic increases in prices might play to the interests of the real estate industry. Namely, those persons who were holding off buying have a flashing green light to now venture out and do the rounds with real estate agents. Indeed, the magnitude of the reported price increases could potentially generate a buying panic of sorts as prospective buyers feel the pressure to buy before prices go up too much more and/or they miss out on the price gains from owning a home.
In December, we had the opposite situation. CREA indexes appeared to be substantially overstating the decline in prices. The appearance of steep declines could also dovetail with industry interests. As I conjectured back then, it could erode the optimism of owners with houses listed for sale, leading them to cut their asking prices rather than let their properties sit longer on the market in hopes of getting the offer they had hoped for. The end result would be a pick-up in sales.
Flat to moderately trending markets lull buyers and sellers into inaction. Extreme price changes arouse emotions get people off their duffs. Could this be a reason why CREA continues to headline a flawed indicator? Its tendency to overstate price change at turning points can be a tool for altering the buying and selling psychology of the housing market.
4 Responses to “ Why use biased house-price indexes? ”
I think you’re on the right track looking for financial motives for the actions of organizations. Probably closer to the mark is that things continue to be done as they have “always” been done due to momentum, and a change to a better system is resisted for the reasons you give.
By Michael James on Jun 19, 2009
MJ
I am of course just speculating about why CREA continues to use a flawed indicator. It’s entirely possible there are no ulterior motives on the part of CREA. It may simply be a case of not knowing better alternatives exist or it could be a “turf” thing (i.e. reluctance to switch to a measure calculated by another source)
By Larry MacDonald on Jun 19, 2009
Being a real estate appraiser the CREA’s use of the average house price has long been a big pet peeve of mine. The average house price is a horrible measurement of the housing market as it does not account for shifts in market preferences (such as less condo living or increased sales of executive homes).
I must constantly educate my clients on the flaws in this unit of measurement as many expect that if the Average house price went up by 10% so did their home.
CREA must stop this smoke and mirrors technique and start using more reliable measures similar to the U.S., which has a price index. While no measure of the housing market will be perfect most will be radically superior to the average house price.
By Todd on Sep 8, 2009