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My house is not your house — reports on average home prices are of dubious value
Oct 09, 2009

After annoucing WinnipegREALTORS® had its first record sales month this year in September, a business reporter was curious enough to ask what the lowest house sale price was in September. The reporter was told it was $17,000, which is quite a contrast from the highest at $1.15 million — $50,000 above list price.

The reporter was also interested in knowing what the average monthly MLS® house price was and how it compared to the same month in 2008.

Unfortunately, this infomation is invariably of dubious value due to such extremes in house prices. WinnipegREALTORS® has never relied on average pricing due to how varied housing can be in Winnipeg and the surrounding municipalities. Even within one specific MLS® defined territory or area, sales can be quite varied based on the mix and age of housing. 

Some usefullness can be derived when there are thousands of sales over an extended period of time, which can establish a price trend. However, you always have to keep in mind that average price variables can be compositional in nature, meaning they are more a reflection of what are the most active price ranges for house sales.  

Another way of looking at market price variables is to see how the percentage of sales activity is increasing at higher price ranges, which over time is a clear indication that prices are starting to move up. For example, the under $100,000 price range every month this year often makes up less than 10 per cent of all house sales, whereas 10 years ago it made up over 60 per cent of all home sales.

Only use average pricing as a true general guide and then call your REALTOR® to advise you with respect to your own property  if you plan to sell and/or purchase.

The article below is worth reprinting, reporter Helen Morris explains in detail the pitfalls of average pricing.  

 

Mi casa is not su casa; Average-price reports are only a general guide

by Helen Morris

Perhaps you live in an average house on an average street in an average neighbourhood — then again, perhaps not. If you are caught up in the stress of buying or selling a home, it is tempting to become fixated on fluctuations in average prices as a guide to whether the value of your home has risen or fallen since you purchased it.

“Average prices tell the story about a broader trend, for activity and not just price,” said Gregory Klump, chief economist at the Canadian Real Estate Association. “If you’re looking at an average price for an entire area it can be skewed upward or downward by a handful of transactions that are at the high end or ... [by] a lack of [sales] at the high end.”

The average price does not in fact represent the price of an average property — if there were such a thing.

“People seem to be so hung up on average sale price. Part of the problem is that the average is only an average of what is sold. It’s not an average value necessarily for an area,” said Laurin Jeffrey, an agent with Century 21 Regal Realty. “If houses range from $300,000 to $500,000 in a given area and only the $300,000 houses sell in a given period, that doesn’t necessarily mean that the area is worth $300,000.”

Nor will the average give you a price for a specific home.

“Those price trends don’t talk to any one home in particular. It’s useful for establishing bigger picture trends along with what’s happening with price but doesn’t speak to the value of any particular home,” said Klump.

In order to try to work out the market value of your own home or that of a property you would like to purchase, REALTORS® suggest that rather than focusing on a country-wide or even city-wide average price, you go very local.

“If you’re looking for a typical price, you go into an area or a community that you want to look at and you look around and you will find a home that is pretty typical of the area ... you can use that as the guide,” said Don Lawby, chief executive of Century 21 Canada. “What were those homes worth a year ago ... what is being asked for them today? What is the most recent sales activity? And what do they sell for? That’s real typical.”

The level of market activity, not just prices, may vary greatly between and even within a neighbourhood.

“Real estate is entirely local. You can have one area of the city that’s always going to be in higher demand than another area,” said Klump. “For one area of the city where the price tag might be falling, it might be holding very steady and may be even increasing in another area. You really have to talk to somebody who is involved in real estate where you are looking at buying and [with] the property itself.”

The real estate professionals encourage potential buyers and sellers to steer clear of the average prices and look around at the immediate neighbourhood.

“You have to look at ... what comparable houses have sold and what they have sold for,” said Jeffrey.

“If you pull the numbers for all the similar properties in the area, then that average is going to help,” because that's indicative of only those properties.

“There is no Toronto market; there’s a Scarborough market and there’s a sub-market in Scarborough. There’s a Markham market and there’s a sub-market in Markham,” said Lawby. “You need expertise and local expertise where you are going to buy. And you also need to understand what’s going to happen in the future. What are the plans for the area? All of those things.” 

Doing the homework and getting the right agent is key because, “This is, for most people, the largest single investment that they make in their life.”

— Helen Morris article reprinted with the permission of the National Post.