Blogs & Comment

The myth of plunging house prices

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 its 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 arestill above the level of a year ago (by 3.3%). For more detail onthe RSPI, see the websitemaintained by Teranet Inc. and National Bank (also shows price changes at the city level).
The RSPI approach is whats 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 CREAdata 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 loweraverage price for houses. But this is not a price decline: its a change in the mix of houses sold. CREA has undertaken to adjust its data, but theRSPI will remain the less biased measure and should be heard from a lot more in the future.