Skip To Content

Why Looking at Average Home Prices isn’t Enough

10 September 2012

Many factors come into play when discussing the real estate market in Canada; and one of the biggest is home prices. Have they gone up? Increasing slightly could be a sign that our economy’s going up and that people are getting more value out of their home. But are they going up too high? That could be a negative indicator as we could be headed for a bubble, and homeowners could soon find their homes underwater.

Yes, real estate prices are a factor. And they do even tell us a little bit about what’s going on in the country. But they’re just not enough. Or rather, there are better ways of collecting them. Let’s start by looking at the map of Canada below. This map shows the average selling price of a home in some of Canada’s biggest cities. As you would expect, Vancouver sits at the top of the list, closely followed by Toronto and Calgary. Bringing up the tail end are the Atlantic Coast cities, with Saint John, Fredericton and Charlottetown all having the lowest real estate prices.

But once you compare these results with the average sale prices in any particular province, you can see how easily these numbers become skewed. Look at the chart below, outlining the average sale price in Canadian provinces, not cities, and the differences are glaring.

So why is B.C.’s average home price only $532,000 when the average price of a home in Vancouver is nearly $200,000 more than that? And why does Ontario’s average show as almost $100,000 less than Toronto’s market (and probably even less than that with Toronto’s real estate becoming pricier by the day.) Why are there such huge differences between provinces and the cities that reside within them?

It’s because simply looking at average home prices of one province isn’t enough to be able to tell what’s going on in certain markets. You need to delve deeper and know how to use those numbers, and break them up to provide a more realistic picture of what home prices are actually doing in any given area. To do this, there are two main approaches that are used.

The Hedonic Approach
This is the method that MLS uses to create its own home price index. This approach takes many kinds of statistical data pertaining to different neighbourhoods and different price ranges across any particular city. So for instance, if MLS were looking at Toronto, it would look at all the different neighbourhoods; as well as single-family homes, luxury homes, duplexes, condominiums, and other housing types. MLS then gathers all that information and averages it all separately, and then collectively. Not only that, but it also compares these prices over a certain length of time, constantly monitoring and tracking any changes. This allows for a clearer and more accurate picture of what home prices are doing around the entire country as a whole.

“If you really want an accurate measure of what’s going on with home prices, you’ve got to keep the quality of homes constant,” says Gregory Klump, chief economist at the Canadian Real Estate Association. “That’s what the MLS home price index does. It compares apples with apples over time. It’s not subject to a change in the sales mix the way average and median prices are.”

And if you think those are small apples and so, not worth taking the measure, consider the city of Vancouver. This year, using average home prices alone, Vancouver plummeted by 13.3 per cent when compared with last year. The results of the MLS home price index though, actually showed an increase of 1.7 per cent.

The Repeat Sales Approach
This other approach is one that’s used in the industry and thought to return pretty accurate results. It’s the repeat sales approach, and it’s used by experts such as the Teranet-National bank home price index.

This method tracks only properties that have two or more sales on them within a given time frame. This is based on the same concept as the Hedonic Approach, because it uses averages of homes that fall into the same price ranges.

However, there is a flaw with this method as well, and that’s that it assumes that the value of the homes it’s tracking remains the same. Given that fact that home renovation financing is up more than ever before across the country, this could be a bigger factor than some initially think. But as a whole, the repeat sales approach still provides more accuracy than simply averaging home prices across the country.

“The statistics work out the problem that not every house sells every year,” says Tsur Somerville, head of the Centre for Urban Economics and Real Estate at the University of British Columbia.

Home prices are definitely important, and need to be taken into consideration when talking about how the Canadian real estate market is doing. But, it’s even more important that those who use them realize that those prices reflect all homes – everything from $80,000 homes to $1 million homes. When this is taken into consideration and used to collect individual information for individual market segments, then home prices can be used to get a true picture of what the Canadian real estate market is doing.

Contact Us

Contact us today to set up an appointment.

    Thanks for contacting us! We will get in touch with you shortly.