Average Prices & Real Estate

Are CREB® statistics to be trusted when the average and median price show annual gains while the market is clearly in a downturn?

Let’s take a look at the oil industry before answering the above question.

The price of oil is a commodity measured in a standard, uniform fashion: by barrel. If the price of oil is $45 bbl today but was $105 bbl 2 years ago, it’s simple to calculate that the price per barrel has fallen $60 or -57%.   Easy-peasy with no confusion.

With oil, you know that each barrel is equivalent to 42 gallons and that’s that.   It doesn’t change from one year to the next.

Residential real estate doesn’t have the luxury of a constant unit of measurement.    The same homes aren’t being sold month after month and year after year.

Do you compare the price of a barrel of oil one day against the price of a truck or tanker of oil the next and conclude the oil market has skyrocketed?  Or how about WTI crude versus the price of olive oil? Of course not.   And yet that’s essentially what many do when they only look at average and median prices of residential real estate.

There are a vast number of differentiating factors that change the overall makeup of how much a home sells for:

  • Property type (attached, detached, etc)
  • Ownership (freehold, leasehold, condominium)
  • Size (lot size and square footage of home)
  • Age (new, resale, infill)
  • Location (lakefront, inner-city, suburbs, cul-de-sac, etc)
  • Upgrades & renos (hardwood, granite, windows, shingles, etc)
  • Development (basement, landscaping)

A higher percentage of suburban condo sales one month could depress overall average prices, while more luxury sales would skew it higher.

The real estate industry has attempted to create some uniformity by using “benchmark” prices.  The same types of homes with the same attributes are used when comparing prices from one period to the next.  Other indices, like Teranet-National Bank Home Price Index uses sales pairs (homes that have sold at least twice) for a more apples-to-apples comparison.

The benchmark isn’t perfect – it only provides us with a more accurate reflection of which direction prices are trending.   Average and median prices, on the other hand, only reflect the sales mix during a specific period.

A good example that illustrates how impractical it is to only follow the average and median price is to look at the community statistics which magnifies the effect.

Upper Mount Royal

Did average prices and median prices really spike 285.1% y/y in January? Or do you think a 10.4% drop is the more accurate figure? (click to enlarge)

In January 2015, an apartment sold for $446,000.  A year later, a 3777 sq ft detached home sold for $1,717,500.   Did Upper Mount Royal real estate really experience a 285.1% annual increase as the average and median price suggests?  Or is it more likely that prices declined by -10.4% as shown by the benchmark price?

There is no magic number to look at when determining the health of the real estate market. Track inventory and sales levels to ascertain supply and demand.   Housing starts and building permits are a good leading indicator.  Keep an eye on immigration and employment levels.  Review the different price measurements and see if they complement each other.  If not, determine why that’s the case.

Finally, don’t put so much stock on the average price.  It can be 100% accurate and at the same conceal underlying market conditions.

The Alberta Economic Dashboard is a great resource to quickly see how Alberta's economy is performing

The Alberta Economic Dashboard is a great resource to see how Alberta’s economy is currently performing along with historical charting

Please feel free to post your comment or question

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s