Saturday, July 28, 2012

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)


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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  1. Reporting both the average and median sales price is the most informative option, short of a histogram.

  2. Not only are your posts educational, they tickled me pink. Thank you, Professor.

  3. Real Estate is like a cult. You have to believe what you believe.

  4. Thank you very much for this blog! Do you have any meet ups in mind for the future?

  5. Do you have any examples of where sale prices of comparables are down this much?

    And if Ms Cooper is talking in real terms, for specific segments of the Vancouver market, she's not far off.

    1. Check out Eat your heart out.

  6. Sherry's numbers are a little on the high side. I wonder if maybe she was quoting from internal bank data that is more up to date than info available from REBGV. That or she may have let on what the bank sees as price projections for the next period.

    Regardless, this gets us back to a point I have made before that I think is important to consider.

    None of the price metrics being used have much validity if sales volumes fall off a cliff. The incredibly dismal numbers from this week make that clear.

    Just using average price as an example we can see that it has little meaning when only 40 homes moved across the whole Lower Mainland the other day.

    Of course, an average or median price can be arrived at whether there are 40 sales or 4000 but what is worth noting is it is aggregate volumes that truly count.

    Small volumes naturally open a can of worms where the reality on the ground can look quite distorted. You see this play out in the stock market all the time. Low volume days can lead prices up or down in wild swings as the lack of participants means small numbers move markets.

    And that is why most people will never get an opportunity to sell off the peak. They have made a big mistake in timing the market because once sales really falter (like now) there ain't much but crying left for the crowd who came late to the listings party. What they needed to do was sell while volumes were high and before the actual peak arrived.

    Can't say we did not warn them though. Some people are just too smart and too arrogant for their own good. Now they can enjoy paying down their debt or watching their equity wither away day after day.