Tiffany Sebasitan, Realtor

Average House Prices Don't Tell the Real Story

by Jim Adair

Samuel Clemens, better known as Mark Twain, wrote that "figures don't lie, but liars figure." He also credited Benjamin Disraeli with the quote: "There are three kinds of lies: lies, damned lies and statistics."


Canada's housing market statistics have been making headlines this year, as the number of sales and average house prices have declined for the first time in many years. The drop in average home prices, in particular, are making dramatic headlines, worrying Canadians that a full-scale housing crash is underway. But on the front lines, real estate leaders say the market isn't as bad as the media makes it sound.

Part of the problem may be those lying statistics.

Average house prices reported in Canada are based on sales through the Multiple Listings Service, which is operated locally by real estate boards across the country. National numbers are compiled and reported each month by the Canadian Real Estate Association (CREA).

The system is flawed because it doesn't include private and most new home sales, but it's the most accurate reflection of house prices that's available. The numbers are used by most economists and by Canada Mortgage and Housing Corp. as a major economic indicator.

Recently two banks announced they were introducing new indexes to present a more accurate picture of house prices. First off the mark was TD Bank Financial Group, which unveiled the TD Home Price Index (TD HPI) in November.

TD says that the problem with using average MLS prices is seen when markets are fluctuating significantly. "Such is the case in Canada at the moment," say TD economists Pascal Gauthier and Grant Bishop in a special report. "As at Oct. 08, sales were down 50 per cent British Columbia, for example. Since average prices in British Columbia are the highest in the nation, the drop in sales tends to overstate the extent of price declines when applied to a simple national average."

The new TD HPI weights the markets by the outstanding stock of homes within each market. "This will help control for price volatility related solely to shifts in sales volumes – which arguably distort national figures," says Gauthier.

"We weigh each major market by its share of housing stock (as per cent of total) using the number of dwellings from Census data, interpolated as needed between Census years. To remain agnostic about post-2006 Census developments, weights are fixed after the 2006 Census until we get the next Census from 2011."

Using this example, the CREA sales-weighted average price for major markets in October was down 10.9 per cent from last year, while the TD HPI stock-weighted measure shows a decline of just 4.6 per cent.

National Bank Financial Group and Teranet have also launched a house price index, which they call "the first independent representation of the rate of change of Canadian single-family home prices based on 'repeat sale methodology'."

Monthly indices for six metropolitan areas – Calgary, Halifax, Ottawa, Montreal, Toronto and Vancouver – will be combined to form a Canadian Composite Index. The measurements are based on the records of public land registries. In Ontario, Teranet operates the province's Electronic Land Registration System.

Similar to the house price benchmark in the United States, the Teranet - National Bank index compares the values of properties that have been sold at least twice. The two prices are used to measure the increase or decrease in property value between the two periods of measurement. The index is published on the last Wednesday of each month at

"As an independent benchmark, the index will be used to sell financial products connected to the housing market while giving investors access to the residential real estate market as an asset class," says the National Bank and Teranet in a news release.

As a further example of how numbers can present a distorted picture of what's going on the market, Toronto Realtor John Pasalis has been explaining on his blog ( how the city's price declines have been exaggerated recently.

In October 2007, the City of Toronto approved a new land transfer tax that took effect in early 2008. The move created a rush to close home sales before the new tax kicked in, and affected mid- to upper-priced homes the most, because first-time buyers are exempt from the tax.

Pasalis says that although real estate sales usually decline in the fourth quarter of the year, in 2007 sales surged. Prices rose by an average of 17 per cent during the last quarter of the year, and were 28 per cent higher in December 2007 than in December 2006. "Did every house in Toronto appreciate by 28 per cent in December 2007 or were more people buying expensive homes in order to avoid the land transfer tax?" says Pasalis.

He says a disproportionate number of homes priced at more than $1 million (131 versus 47 the year before) skewed the average prices up in 2007.

"Even if actual house values remain unchanged during the last quarter of 2008, we will still see a significant decline in average prices because we anticipate fewer sales of $1 million this quarter. Thus, any decline in average prices during the final quarter of 2008 will be exaggerated by the inflated prices of 2007. This will make Toronto's real estate market appear to be depreciating at a much faster rate than it really is."

Pascalis recently interviewed Bishop, the TD economist, about the bank's new price index. The interview explains more about the reasoning behind the new index, and its methodology. For information about the Teranet – National Bank index, a 17-page section on the website explains how the number crunching works.

Published: December 9, 2008


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