March 18, 2009

Plunging house prices may be exaggerated as CREA methodology flawed…Teranet’s RSPI introduces next generation home price statistics…jury still out on if new system any better

The common conception is that home prices in Canada have been tumbling. We base this view on statistics compiled by the Canadian Real Estate Association (CREA). Each month they release the data on the previous month – this month we received February’s data, “RESALE HOME PRICES FALL 9.2 PER CENT IN FEBRUARY”.

Of issue is that the measure used to determine these figures is flawed. In cooking up their ‘magic’ number, CREA just adds up the purchase price of all home sales and then divides the total by the number of homes sold. This may tell us the average selling price of homes in Canada but it does not tell us how the value of homes is changing. To do this one would have to consider types of homes that were sold, size, location 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, is considered a less biased measure as its methodology controls for changes in the mix of houses over time.

As of today, the Teranet site is only showing data until December 2008 and the jury is still out on whether this service will be of real value. Nevertheless, it’s worth keeping an eye on as well as reminding ourselvesthat CREA’s statistics should be taken with some large grains of salt.

Update – in an email correspondence between BuzzBuzzHome and Simon Cote of Teranet’s RSPI we were told the following “The index is published monthly, on the last Wednesday of each month, with a 60 day lag. The website will be updated with the January numbers on March 25th (2009).”

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