In many real estate markets across the country, the change in real estate prices is represented by the 'average' or 'median' price. Although an average and median do represent some things about the sales of homes they can pose problems for those trying to analyze what is really going on. One of these challenges is that average and median prices can change dramatically if the mix of sales changes to favour the low end of high end of the housing market.
Take this situation for example:
In October, 5 homes sell, priced at $200, $250, $300, $450, and $900.
Average price = (200 + 250 + 300 + 450 + 900) / 5 = Average Price is $420.
Median price is $300 which of course tells a completely different story.
In November, 4 homes sell priced at $175, $200, $350, and $425.
Average price = (175 + 200 + 350 + 425) / 4 = Average price is $287.5
Median price = (200 + 350) / 2 = Median is $275
The determination that I have made is that average prices and median prices have some value to inform us of price changes but they are highly volatile based on the number of and mix of sales. If there are a large portion of high end or low end sales those numbers can really be thrown off. This is why some real estate boards (REBGV and FVREB) use a benchmark which adjusts prices for quality so 2000 suare foot, 4 bedroom homes are compared against other 2000 square foot, 4 bedroom homes. These benchmarks eliminate a lot of problems with averages and medians.
An even better method of measuring prices is the repeat sales method which is called the Case Shiller Home Price Index in the United States. There is a national index, 20 city index, 10 city index, and separate indexes for 20 large metro areas in the United States.
On December 2nd, 2008 Canada got our own repeat sales house price index as National Bank Financial Group and Teranet ... announced the launch of the Teranet - National Bank House Price Index(TM), the first independent representation of the rate of change of Canadian single-family home prices based on the "repeat sale methodology."
You can read more about this methodology here. Essentially this methodology is a true apples to apples comparison of homes. The major issue with the repeat sales method is that there is a time lag to get the data out to the public and this timelinesss is an important factor when making large financial decisions such as a purchase or sale of a home or investment. Additionally, the current index is only available for six cities across Canada and if you are trying to follow other markets I guess you are left to do your own comparisons.
I am glad that someone with the appropriate resources has undertaken the task of establshing a repeat sales methodology house price index for major Canadian centres. It will allow observers to have a more accurate view on what is actually happening to house prices.
For now those prices are falling in Vancouver, Calgary, Toronto, and Halifax.
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