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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Monday Post #1: On the Real Estate front...

Happy New Year everyone. First up this week is information on the Real Estate front.

With almost everyone now seemingly calling for a correction of some kind the data for the month of December 2011 is keenly anticipated.

Realtor Larry Yatkowsky is out with his latest graph (click image above to enlarge) and looking at the figures for Single Family Houses (SFH) you certainly have to wonder if the long anticipated correction may have begun.

The average price for SFH's dropped a significant 6% month over month (from $1,134,396 to $1,064,249). This drop means SFH's are now down a total of 13% from their peak highs. Our friends over at VREAA have laid out that drop month by month:

May 2011: $1,223,421 *Historical peak
June 2011: $1,215,265
July 2011: $1,133,357
August 2011: $1,162,242
September 2011: $1,104,896
October 2011: $1,162,349
November 2011: $1,134,936
December 2011: $1,064,249 (down 13% since peak)

As you can see it isn't a straight drop, but it is a stunning 13% decline from the high of 7 months ago. Another interesting statistic is Inventory.

When you compare December of 2011 to December of 2010, the total inventory for sale is up 17%. Meanwhile total sales are down - also by 17%. While December is always considered a slow month, this large boost in inventory with a corresponding drop in sales activity is significant. And the downward trend on the average price graph certainly stands out and captures your attention.

All eyes are now focused on the Spring market. Will the number of listings start to accelerate with listings ballooning in January, February and March? Will sales continue their downward slide as buyers hesitate for fear of catching a falling knife?

And what of the growing number of Boomers approaching retirement - 70% of whom lack sufficient funds for the Golden Years and whose entire retirement 'plan' lies solely in selling their bubble value property to cash in on those gains and downsize?

Will there be a rush to list and complete a sale even if it means accepting significantly lower offers beyond the current 14% drop from the bubble highs? They would still be making a massive profit over what they paid 30 - 40 years ago so the ability/willingness to accept what would currently be considered low-ball offers is there.

We continue to watch with fascination. 

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