The Problem With Housing Stats

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 unbiased measure and should be heard from a lot more in the future.

Comments

[Sean Mc:]

It's also worth pointing out that in a rising market the mix is inherently skewed toward the high end as people stretch as much as possible to use leverage, low rates and an upward trend in price to their advantage. In a down market, the mix is inherently skewed to the low end, which is where the best deals occur for many, many reasons.

2008 Dec 10 12:40 PM