Economists agree benchmark prices are the most accurate
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 the public has the most accurate picture of home price trends, the Real Estate Board of Greater Vancouver 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. They contracted 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 various factors into account, such as housing category, location, number of rooms and square footage, in a way that no other price-tracking method does.
What makes the MLS® HPI a better measure?
The MLS® HPI tracks changes of “typical” homes and excludes the extreme highend 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,” said Robyn Adamache, principal, market analyst ( Vancouver), Canada Mortgage and Housing Corporation. “When it comes to monitoring the market and measuring trends, MLS® HPI benchmark prices provide a more stable picture than average sale price alone.”
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 estimate home prices based on their “basket” of housing features. Those attributes remain constant over time, making the MLS® HPI the best tool for “applesto-apples” historical comparisons.
Why use benchmark prices over averages or medians?
Average price is calculated by adding the dollar value of all sales in an area and dividing this figure by the number of homes sold. The average price is 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,” said 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 implementation of the foreign buyer tax. Average prices began to climb again in the following month.”
Median price is calculated by listing all sales in an area from the lowest price to the highest price, and choosing the middle price. Like averages, the median prices are easy to compile and understand.
“The downside is that the median prices are also skewed by the changing mix of homes sold, which makes it more difficult to get an accurate picture of home value during a changing market,” Pastrick said.