“Average prices indicate market trends only. They do not reflect actual prices, which vary from house to house and from area to area.
“For information on a specific area, contact your local REALTOR®.”
This statement is found in REALTORS® Association of Edmonton MLS® housing market press releases. It is typical to have similar versions of the statement from any REALTOR® association when it comes to average housing prices.
The Saskatoon Region Association of REALTORS® goes further by offering an entire explanation on what the average selling price means, which is shown below. It references sales and prices in its market at a certain time. It’s relevance is that it applies equally to any real estate market with its own set of sales numbers and prices.
What does the average residential selling price mean?
Consumers may view all SRAR media releases on the association website www.srar.ca. The average selling price process is explained in each release to minimize confusion as to how the average selling price number is used.
The average residential price is derived by taking the month’s dollar volume of homes sold and dividing that number by the unit sales number. The percentage of change should not be used unilaterally as prices vary from area to area. Consumers wishing an accurate estimate of value for their home should contact a REALTOR® member to do a comparative market analysis.
The average selling price tracks the market trends and identifies changes as they occur. An example is the month of June 2008 when 26 homes sold between $500,000 and $750,000, 10 between $450,000 and $500,000 and 32 homes that sold between $400,000 and $450,000. In December there were five homes that sold between $500,000 and $750,000, five between $450,000 and $500,000 and seven that sold between $400,000 and $450,000.
When the sales figure for the month is divided into the dollar volume of real estate sold for the month, the average selling price will be higher if more higher priced homes were sold.
This number may not be directly affected by the unit sales number. For example, June’s average selling price was $310,386 and July’s average price was $292,428.
There were 27 more sales in July. The difference in average selling price resulted from fewer high-priced homes selling in July. For example, there were only 12 homes sold between $500,000 and $750,000, 18 between $450,000 and $500,000 and 23 homes sold between $400,000 and $500,000.
Most news reports place a heavy focus on “average selling prices” and consumers can easily misunderstand their use. Here’s another good example. During the month of August, the average price of a Saskatoon home was $279,366. In September, it jumped to $297,836. This “jump” resulted from a larger number of high-end homes which skewed the average upwards and was not a reflection of actual price increases in the market.
In fact, home inventories were at their highest point for the year, creating extremely competitive conditions for sellers. Most REALTORS® will likely tell you that prices actually decreased, at least slightly during that period where the average may have led people to believe they rose.
We trust this explanation will assist consumers to understand the average selling price process and how it is used to track trends rather than to determine specific values for individual homes.
Toronto real estate market
Note: This example was found in an article by editor Jim Adair in the January 2009 REM issue. It was titled Average House Prices Don’t Tell the Real Story.
Another good example of how average prices can be misleading comes from Toronto. REALTOR® John Pasalis indicates that Toronto passed a new city land transfer tax in October 2007 to come into effect early in 2008. Included in Toronto’s new home buyer tax, which adds significant closing costs in the thousands of dollars on a more expensive home, is a first-time home buyer exemption. It exempts any first-time home purchaser on any home up to $400,000.
So, Pasalis explained, although upper-end buyers would want to avoid this onerous tax whenever possible, this segment of the market not surprisingly saw an unusually active fourth-quarter in 2007. With the lower end of the market not as affected by this tax, especially with first-time buyers making up a sizable share of purchasers for the lower-priced homes, the fourth-quarter average sale price shot up 17 per cent over the same period in 2006.
December 2007 was actually up an astounding 28 per cent over December 2006. Where the skew to the upper-end segment of the market really hits home is in those houses selling for over $1 million. It was no contest, as 131 homes sold in the fourth-quarter of 2007 versus 47 in the same period in 2006.
This is what REALTOR® John Pasalis had to say about it: “Even if actual house values remain unchanged during the last quarter of 2008, we will still see a significant decline in average prices because we anticipate fewer sales of $1 million this quarter.
“Thus, any decline in average prices during the final quarter of 2008 will be exaggerated by the inflated prices of 2007. This will make Toronto’s market appear to be depreciating at a much faster rate that it really is.”
Even in Winnipeg’s first quarter this year, our average price was quite high due to a drop-off in year-over-year sales activity that was more pronounced in sales under $200,000. This is referred to as a compositional shift in the average price, which has a lot more to do with where the sales are occurring than the fact house prices in all price ranges are rising.
In the wake of attention-grabbing headlines — one that screams at you with a major drop or big jump in the average sale price — you should check with your REALTOR®, as your home’s listing price may have little to do with the headline.
This is why WinnipegREALTORS® uses average monthly pricing sparingly, but sometimes cannot avoid it due to the media fixation on following average pricing no matter how flawed it can be without qualifications attached.