BMO says Vancouver market now down 15% - 20%. So much for the HPI as an educated measure of the market.

Faithful readers will recall that last Wednesday we were discussing 'average' prices vs the 'jury-rigged' MLS Home Price Index (HPI).

The Real Estate industry has launched their campaign against the negative news that house prices were declining.  They tell us that if you were to follow the 'misleading' average home price than you are...

"... left the impression that prices in the Canadian housing market had dropped compared to the previous year."

Silly us.

And why are 'averages'  bad?

"Averages are a horrible place to go," says Tsur Somerville, who heads up the Centre for Urban Economics and Real Estate at the University of British Columbia.

Gregory Klump, the chief economist at CREA, agrees. Using average prices is "like looking in a funhouse mirror," he warns.

So we are what supposed to use the Home Price Index (HPI). And what is that?

More than 15 years ago, the MLS developed its own home price index to get a clearer picture of price trends. It uses a complex statistical model to measure the rate at which housing prices change over time by tracking price changes in "typical" homes in each market. Each neighbourhood has a typical benchmark home.

"If you really want an accurate measure of what's going on with home prices, you've got to keep the quality of the homes constant," says CREA's Klump. "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."

What difference do the different approaches make? In Vancouver, for instance, the average selling price in June was $701,141, down 13.3% from last year. But using the MLS home price index methodology, Greater Vancouver prices actually rose year-over-year by 1.7%.

Ahh yes.

You see, all the 'educated' folks aren't mislead by silly things like the 'appearance' of price drops. The complex statistical model will tell you the truth. And the truth is prices haven't dropped the past year at all. They're rising.

The moral?... Don't believe that malarky that the market has dropped 13.7% Listen to seasoned, educated economists who will tell you what the numbers really mean.

So let's do that, shall we.

Meet Sherry Cooper.

Cooper is the Bank of Montreal's (BMO) Chief Economist. What does Cooper have to say about the Vancouver market?

On July 16th, on BNN's Market Sense, Cooper noted:

"There is already about a 15% to 20% correction in Vancouver, thanks to the overbuilding during the Olympics.

(hat tip VREAA)

Err?

15%-20% down so far?

So much for the jury-rigged HPI... at least as far as 'educated' economists go.

I mean... when even a real estate pumper like the Bank of Montreal's Chief Economist refuses to drink you Kool-Aid, what chance do you have that the rest of us will?

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The Story In Your Eyes

About a year and a bit ago it was time to pull up the ottoman, grab a bag of popcorn and watch the saga play itself out.

Of course a great many were gleefully anticipating a Canadian-style housing collapse that would mimic the great American catastrophe playing out on our cousins to the south.

But it was frustrated despair that many felt as the Canadian story took an unexpected path - government intervention, emergency interest rates, CHMC directives to approve sub-primers.

A watched pot never boils. And with that thought, I am now reminded of the classic Moody Blues song, The Story in your Eyes.

"Listen to the tide slowly turning
Wash all our heartaches away
We're part of the fire that is burning
And from the ashes we can build another day"

For the past month and a half we have watched the media slowly begin to grasp the true condition of what has been driving our real estate market, watched the bond market start to drive interest rates up and listened to the Governor of the Bank of Canada 'tsk-tsk' Canadians for overdosing on the crack cocaine of the emergency level interest rates he has set out on the table.

The result?

As CREA’s economist Gregory Klump says, “with interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates."

Typical? It will only be classified as 'typical' if the bleeding is minimized. Last month's statistics are out and the 'demand-driven downturn' has begun.

Detached houses prices are down 4.6% from April, listings are exploding and buyers are exiting en masse.

And yesterday... the Bank of Canada doubled their emergency interest rate from 0.25% to 0.50%.

This comes on the heels of StatsCan reporting that the personal savings rate of Canadians has plunged. We now spend, on average, 97.2% of what we earn.

Debt has postively exploded among Canadians.

Mortgage debt is at an all-time high and we’ve never owed so much on credit cards, lines of credit, car loans and/or home equity loans.

And this debt orgy has all been built up when interest rates are at the lowest point in history.

The email inbox reveals numerous comments that I am gleefully crowing over the hardships I expect to befall my fellow countrymen.

Nothing could be further from the truth.

"But I'm frightened for the children
That the live that we are living is in vain
And the sunshine we've been waiting for
Will turn to rain"

I focus intently on the obvious conditions which are brewing because to ignore what is coming is pure folly.

As I said Monday, understand what is going on around you. We live in extraordinary times, most of us just don't realize it yet.



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Sunshine, lollipops and rainbows everywhere

Ahh... ya gotta love it.

Almost as if on Que, enter the Canadian Real Estate Association trying to slap down yesterday's bank economist's attempts to piss on the R/E parade.

"Don't expect big drop in B.C. home prices," trumpets the CREA. "If you are waiting for housing prices to drop substantially in B.C., it's probably not going to happen."

Of course not, real estate only ever goes up.

CREA Chief Economist Gregory Klump predicts a small decline in the average price in B.C. in 2011. "After that it will likely stabilize so what's going to happen is over time incomes will continue to rise as well. So that's going to return the ratio to its long term average. It's going to take longer than elsewhere in Canada because you're farther away from a long term average than other provinces are."

But if Klump's prognosis is still no pessimistic for you he quickly adds that "the price-to-income ratio may be affected by investors - again skewing the market upward."

Leslie Gore would be so proud.

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