Measuring the market – is the HPI the best tool?

Posted on January 12th, 2017

What’s happening to home prices and where are they headed?

Realtors are asked these questions everyday by clients looking for accurate information to base their decision on whether it’s a good time to buy or sell.

Are these market watchers getting the best data?

To ensure they are, the Real Estate Board of Greater Vancouver originally developed the Housing Price Index (HPI), in 1997, together with the Fraser Valley, Calgary, Toronto and Montreal real estate boards and the Canadian Real Estate Association.

It was created for the Real Estate Boards by Dr. Stan Hamilton of the UBC Faculty of Commerce (now the Sauder School of Business) and David Hobden, now an economist with Central 1 Credit Union.

What is the HPI?
The HPI is a statistical tool modeled on the Consumer Price Index (CPI).

While, the CPI measures the rate of price change for a fixed basket of goods and services such as food, clothing and transportation, the HPI measures the rate of price change for a fixed set of characteristics for a typical property.

These include age, square footage, lot size, number of bedrooms, bathrooms, and fireplaces.

The HPI is produced for detached homes, townhouses, and apartment condominiums and also combined into a composite index based on all properties in each submarket area.

Data is sourced from listing contracts.

Percentage changes are estimated for one month, three months, six months, one year, three years, five years and 10 years.

Why not use average or median prices?
Before the HPI, the Real Estate Board reported residential activity using average and median prices.

Average price
The average price is calculated by adding the dollar value of all sales in an area and this number by the total number of homes sold.

The average price is easy to compile and understand.

“The downside is the average price is often volatile due to the changing mix of homes sold in a given month or time period,” said Helmut Pastrick, Central 1 Credit Union chief economist.

“For example in August 2016, the average price for detached homes plunged because of fewer luxury home sales due to the foreign buyers tax.”

Median price
The median price is calculated by listing all sales in an area from the lowest price to the highest price and then taking the midpoint.

Like the average price, the median price is easy to compile and understand.

“The downside is the median price is also skewed by the changing mix of homes sold,” said Pastrick.

The HPI – a better tool
What makes the HPI a better measure?

“The key advantage is the HPI isn’t skewed by a changing mix of properties sold in a given month,” said Robyn Adamache, Principal Market Analysis, Canada Mortgage and Housing.

“We may get a month like August where the average price takes a huge drop because high priced home sales have stalled. But this may be a one-time event, just a blip in the data,” said Adamache.

“When it comes to monitoring the market and measuring trends, the HPI is a far better measure.”

If you have questions about the HPI, contact Andrew Peck, vice-president and general manager, Royal Pacific Realty Group at apeck@royalpacific.com.

Source: REBGV
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