Canada’s most prominent House Price Index (HPI) has received a change that could make it unreliable, warns a prominent firm. Oxford Economics is warning clients that the latest changes to the Canadian Real Estate Association (CREA) HPI makes it problematic. The latest change has led to a massive historical revision, minimizing growth over the past few years. As a result, the firm will no longer rely on the HPI, and in some cases won’t be using CREA data at all.
House Price Index
The HPI is the source of the CREA benchmark, or “typical,” home price. Since the composition of sales changes from month-to-month, there can be large variations in average and median sale prices. The HPI, in theory, solves this problem by creating an index. This index makes quantitative and qualitative adjustments, using an approach that’s more typical in appraisal.
To ensure the mix represents current sales, CREA updates the basket annually. Nothing new, but usually they use a process called linking—an adjustment that connects the current benchmark to historical ones. Now they’re dropping linking, resulting in a re-calculation of the index for each year update.
CREA argues this will make the index more reliable, but Oxford Economics is warning clients that the latest modification is more extreme than necessary. It’ll obfuscate trends, making it nearly impossible to follow, which is a benefit and problem, depending on who’s looking at it.
Canadian Real Estate Revision Trims Nearly 40% of Growth
Finding the problems Stillo is referencing isn’t hard, one just has to look at the shift. Starting in 2007 and forward, the HPI has been revised 10% lower. At the same time, the benchmark price increases by 9% at the start of the series in 2005. Historical trends have now been minimized, both showing much smaller corrections.
The gap between the trough and peak are now much closer together—narrowing the gains. In the case of the HPI, price growth from 2005 to 2023 goes from 236% growth to 197% in the newly revised data. That’s one way to trim 39% price growth and make housing “more affordable”, it’s just not the right way.
“CREA’s material revisions to its historical HPI and house prices, nationally and across markets, are problematic for forecasting and make it difficult to maintain a sensible long-term equilibrium house price,” explains Stillo.
Prominent Economics Suggests Using More Reliable Measures, Like The Teranet-National Bank HPI
A central issue here is what the HPI actually measures. Most assume it measures the change in home prices, but that’s not the way Stillo sees it. By using this appraisal-style model, he argues it measures the value people assign to each attribute in a home’s price.
Considering in tight markets, things like location and amenities play a smaller role in determining price, the HPI would be of little benefit to anyone looking to determine trends.
Moving forward, Oxford Economics suggests using more consistent and reliable methods. Their analysis will be placing emphasis on CREA’s seasonally adjusted average sale price. It’s argued that it’s much more volatile than a benchmark, but his pull of the data reveals a smaller variation than the new revision makes.
“While our attention will shift mostly to CREA’s seasonally adjusted average sale price, we will also continue monitoring other less widely reported sources for house prices. High on our list is the Teranet-National Bank HPI which uses a repeat-sales method of price measurement to ensure constant level quality of each property,” says the firm.