Below is a slightly edited explanation of the HPI, provided to agents by CREA/REBGV.
WHAT IS THE MLS® HPI?
The MLS® Home Price Index (MLS® HPI) is one of several tools the REBGV provides to help promote a solid understanding of the changes in home price trends and their impact on the market value of homes.
Use the MLS® HPI to compare trends locally — for specific housing types and neighbourhoods — or across five major Canadian markets.
WHAT CAN THE MLS® HPI DO?
The MLS® HPI is not designed to predict the value of an individual property. However, since it is based on MLS® listing content — a comprehensive and accurate source of real estate data in Canada — the MLS® HPI provides a more precise picture of home price trends in a given region, municipality or neighbourhood. As home price information becomes more and more accessible to the general public, the ability to derive meaning from it takes on greater importance.
HOW DOES THE MLS® HPI WORK?
The MLS® HPI can help gauge changes in housing prices over time, including changes in:
• Overall home prices for the market as a whole
• Prices for specific housing categories in a given area, or for the overall market
EASY TO CALCULATE
The MLS® HPI tracks changes in home prices by comparing price levels at a point in time with price levels in a base (reference) period. The base period value is always 100. For example, if the base period for single-family homes is 2005, and the MLS® HPI value for single-family homes in December 2011 is 149.1, you know that the value of single-family homes is up 49.1%, compared with 2005 (149.1 − 100 = 49.1%).
Q: How is the MLS® HPI calculated?
A: The MLS® HPI is calculated using a sophisticated statistical model, in which the price of a home is estimated based on both its quantitative (e.g., the number of rooms it has) and qualitative (e.g., whether it has a finished basement) features. Based on these estimates, the MLS® HPI can be used to calculate the price for benchmark homes, whose features are typical of homes sold in a given area.
Q: How is the MLS® HPI different from average and median home price calculations?
A: The MLS® HPI is based on the value homebuyers assign to various housing attributes, which tend to evolve gradually over time.
This means that price changes calculated using the MLS® HPI are less volatile than those derived using common measures like average and median, which can swing dramatically in response to changes with high-end or low-end sales volumes over time.
It is often difficult to determine if average or median price fluctuations really reflect changes in buyers’ willingness to pay for certain housing attributes, or just changes in the volume of very expensive or inexpensive home sales from one time period to the next. The MLS® HPI removes that uncertainty.
Q: How can the MLS® HPI be used with average and median prices?
A: Comparing the MLS® HPI value for a given house type in a given market with the average selling price for the same home type and market can provide useful insights. For example, if there is a spike in the average home price that is well above the MLS® HPI value, it may point to an increase in the proportion of high-end homes sold during a given period. Looking at this in the context of the current economic conditions (e.g., recovery from a recession) may provide interesting analysis and fuel for a value-added discussion between you and your clients.
Q: How is the MLS® HPI different from the repeat sales approach?
A: The repeat sales approach has garnered substantial media attention over the past few years in Canada and the United States. However, the MLS® HPI is a superior tool for tracking home price trends.
The repeat sales approach:
• Omits useful information and limits its sample size because it counts only homes that have been sold
at least twice
• Cannot reliably track home prices by sub-market (housing subcategory and/or sub-area)
• Lags well behind current trends due to data collection timelines and availability
• Assumes that both the qualitative and the quantitative attributes of homes remain constant; the significance of Canadian home renovation expenditure each year makes this assumption unrealistic.
Q: What types of homes does the MLS® HPI track?
A: The MLS® HPI is available for the following housing types:
• One-storey, single-family homes
• Two-storey, single-family homes
• Townhouse/row units
• Apartment/condo units
Using the MLS® HPI, you can track prices for these housing types within a market, and/or for the market overall.
NOTE: In some markets, the single-family home category is broken down into detached and attached homes.
Q: What is a benchmark home?
A: A benchmark home is a model of a “typical” home in a given area. It is composed of a set of attributes typical of homes in the area where it is located, and remains constant over time. However, since “typical” homes are different from one area to the next, the descriptions of benchmark homes differ between areas as well. A complete set of benchmark home attributes in each category tracked by the MLS® HPI in each area can be found here. Benchmark property descriptions are based on median values for quantitative property attributes (e.g., above-ground living area in square feet), and by the most commonly occurring value (i.e., modal value) for each qualitative attribute (e.g., basement is not finished). Benchmark home prices are estimated based solely on these “typical” homes. By comparison, actual MLS® HPI values refer to homes whose attributes differ, so they are based on a broader set of properties in each housing category. For example, the above-ground living area for a benchmark property in a given area may be 800 square feet, whereas the MLS® HPI would include homes in the same category whose above-ground living area varies. So, while the benchmark prices are useful for comparing price levels and price growth for benchmark
homes, the MLS® HPI is a better source of information on general price trends in each housing category. Benchmark prices in each of the housing categories tracked by the MLS® HPI are available for the overall market. This enables benchmark home prices and price changes to be compared across areas, and with the overall market.
Q: What are Relative Benchmark Prices?
A: Relative Benchmark Prices (RBP) show the percentage by which a benchmark price in a particular area and category is above (or below) that for the overall market at any specific point in time.
Q: How can I use Relative Benchmark Prices?
A: For each housing category tracked by the MLS® HPI, the RBP for the overall market is given a value of 100
at every point in time. This makes it easy to quickly identify benchmark price differences for any particular area compared with the overall market, or to calculate benchmark price differences between areas. When you use the RBP rather than the benchmark price, the calculations become simpler, and it’s easier to see the percentage by which benchmark prices are above or below that for the overall market.
Q: Is the idea of a Home Price Index new to Canada?
A: The real estate boards of Fraser Valley and Greater Vancouver have had an MLS® HPI in place since the mid-1990s. It provides information on home prices for British Columbia’s Lower Mainland, and has been widely recognized as the most accurate indication of housing price trends in those markets. However, the MLS® HPI is new, in that it is the first Home Price Index to use MLS® data to track trends in home prices in markets across Canada.
Q: How often is the MLS® HPI published?
A: The MLS® HPI is published in each of Canada’s major real estate markets (Montreal, Toronto, Calgary,Vancouver and the Fraser Valley) at or near the beginning of each month, to reflect activity that occurred during the previous month.