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MLS® Home Price Index explained


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#1 MarkoJ

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Posted 19 September 2013 - 01:21 PM

The VREB is rolling out the HPI index for Victoria in the coming months.

MLS® Home Price Index explained, courtesy of VREB:

The MLS® HPI is an alternative measure of real estate prices that provides a clearer picture of market trends than traditional tools such as average or median prices. Until now, our REALTORS® and the public have relied on monthly average pricing statistics to understand trends in housing prices. An average price is obtained by dividing the sum of all sales prices by the number of sales. Averages, however, can be very misleading since the quantity of sales and the disparity or similarity of the properties sold can have a significant impact on the result. From one time period to the next, average prices can fluctuate widely, suggesting market instability where this may not be the case.

To get a median price, all of the sales prices are organized in numeric order. In the case of an even number of sales, the median is the highest price in the lower half of the group. If there is an odd number of sales, the midpoint sale is taken as the median. Neither of these price measurements takes into account the changes in buying pattern. Both methods of price tracking can have the effect of incorrectly estimating the market price that home buyers are actually paying for their homes.

The MLS® HPI concept is modeled after the Consumer Price Index, which measures the rate of price change for a basket of goods and services. A basket is the combination of goods and services that Canadians buy most such as food, clothing, transportation, etc. Instead of measuring goods and services, the MLS® HPI measures the rate at which housing prices change over time, taking into account the type of homes sold. The HPI basket is called a benchmark home.

HPI identifies benchmark homes by using a set of quantitative and qualitative attributes that do not change over time, permitting apples-to-apples comparisons of price over time.

Defining the typical home

The MLS® HPI is a more stable price indicator than average prices, because it tracks changes of “middle-of-the-range” or “typical” homes and excludes the extreme high-end and low-end properties. Typical homes are defined by the various quantitative (measureable) property attributes (e.g. above ground living area in square feet) and qualitative (quality of life) housing features (e.g. proximity to shopping, schools, transportation, hospitals) toward the home price of properties sold in Greater Victoria communities. These features together become the benchmark house, townhouse or apartment in a given area. A benchmark property is designed to represent a typical residential property in a particular MLS® HPI housing market, such as Colwood or Saanich.

For example, perhaps the basket of features for a typical home in a given community includes a 10-year-old, 3-bedroom house without a panoramic or ocean view on a 7,200 sq. ft. lot, with 8 rooms, 2 bathrooms, a fireplace, a 1-car garage and is close to schools. A benchmark price for this home can be created from the individual dollar values given to each of the above features. The breakdown of each month’s real estate sales in a given area is an estimate of current prices paid for bedrooms, bathrooms, fireplaces, and so on. Prices for these qualitative and quantitative features are then applied to the typical house model and an index price is estimated for that month. This type of pricing model involves estimating the price of a property’s features rather than the property itself.
Note: The MLS® HPI offers only a benchmark in which to track price trends. REALTORS® and consumers should be careful not to misinterpret index figures as actual prices. Benchmark properties are considered average properties in a given community and do not reflect any one particular property.

Marko Juras, REALTOR® & Associate Broker | Gold MLS® 2011-2023 | Fair Realty

www.MarkoJuras.com Looking at Condo Pre-Sales in Victoria? Save Thousands!

 

 


#2 Bob Fugger

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Posted 19 September 2013 - 01:57 PM

Note: The MLS® HPI offers only a benchmark in which to track price trends. REALTORS® and consumers should be careful not to misinterpret index figures as actual prices. Benchmark properties are considered average properties in a given community and do not reflect any one particular property.


Thanks for sharing this. A couple of things. First, the disclaimer appears to tell me all I need to know: like average home price, it's not a particularly useful metric. Indeed, it's utility is similar to using an ETF or an index itself to determine if a particular stock is a good investment or not. I get a general idea of what the market is like, but no real insight into the particular property. Or, to pick up the particular analogous line that REALTORS® are expected to toe and use it strangle its own illogical propaganda, the CPI is not a particularly useful metric because it excludes the very items that cause one to most feel inflationary/deflationary impacts. The HPI fails to anticipate or inform because it cannot possibly flatten all of the variables of a home purchase and present it neatly.

Second, as I alluded to above, the utility of the metric is predicated on the fact that it's an improvement on an existing metric: average home price. While HPI/average home price may in fact be a useful economic metric in hindsight - ie explaining why something happened - it's rubbish for present day decision making - kinda like economists (HIYOOOO!!). I mean you get the general plot, but no really pertinent data, because houses are so different. It's like describing Mein Kampf and A Million Little Pieces as autobiographies. Yeah, so? There's no value in that.

Finally, while I trust my realtor (because he was my friend, first), I hold a healthy mistrust/disdain for REALTORS®. BS baffles brains and a pseudo-scientific metric like this is just another tool in the REALTORS® utility belt to break buyers and sellers down. "Look Ma, the REALTOR® says that this house is $10k below the HPI, so we should make a full price offer with no subjects and forget the due diligence, hyuck hyuck hyuck!!" But perhaps I'm being too cynical.

#3 pherthyl

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Posted 19 September 2013 - 06:49 PM

But perhaps I'm being too cynical.


I think you are. The MLS HPI is basically a repeat sale index similar to the Teranet House Price Index: http://housepriceindex.ca
The idea is fundamentally a good one, in that it controls a few more variables than simply looking at average price (which is influenced strongly by whether more lower or higher priced homes sold in that particular period).

I'm not sure whether we need another index, and why it is better than the Teranet, but that's another discussion. Without having analyzed the actual methodology, I would put more faith in the Teranet index since it is not created by the group that stands to benefit the most from encouraging people to buy houses.

#4 MarkoJ

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Posted 19 September 2013 - 08:08 PM

Finally, while I trust my realtor (because he was my friend, first), I hold a healthy mistrust/disdain for REALTORS®. BS baffles brains and a pseudo-scientific metric like this is just another tool in the REALTORS® utility belt to break buyers and sellers down. "Look Ma, the REALTOR® says that this house is $10k below the HPI, so we should make a full price offer with no subjects and forget the due diligence, hyuck hyuck hyuck!!" But perhaps I'm being too cynical.


We aren't friends, but how can you not trust me? I took one course and had to pass a 100 multiple choice exam to get my licence....shesshh. It was hard work :)
As pherthyl has alluded to many times, educating yourself when spending half a million or possibly more is a wise move.

Marko Juras, REALTOR® & Associate Broker | Gold MLS® 2011-2023 | Fair Realty

www.MarkoJuras.com Looking at Condo Pre-Sales in Victoria? Save Thousands!

 

 


 



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