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HPI Explained for Home Sellers in Greater Vancouver & BC

PAGE INDEX : What is it? | The Problem with Averages | Defining the "Typical Home" | Understanding HPI reports.

The Real Estate Board of Greater Vancouver tracks home sales in Greater Vancouver using the Housing Price Index, a statistical tool. The HPI helps home buyers ensure they're getting the best value on their home purchase by comparing today's benchmark typical prices with past prices.

What is the Housing Price Index?

The Housing Price Index (HPI) is an alternative measure of real estate prices that provides a clearer picture of market trends over traditional tools such as mean or median average prices.

What is a mean average?
The average price is obtained by dividing the total dollar volume of sales by the number of sales.

What is a median average?
To obtain a median price, all of the sales prices are arrayed 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.

The HPI concept is modeled after the Consumer Price Index (CPI), which measures the rate of price change for a "basket" of goods and services. Basket is defined as the combination of goods and services that Canadians buy most such as food, shelter, clothing, transportation, etc.

Instead of measuring goods and services, the HPI measures the change in price for a basket of housing features Greater Vancouverites buy most such as lot size, number of rooms, age of the home, the neighbourhood, etc.

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The Problem with Averages

Before the HPI was introduced in 1997, REALTORS® and the public relied on monthly average pricing statistics to understand trends in housing prices. Averages, however, can be very misleading since the quantity and quality of the properties sold in any given area change over time for any number of reasons. As a result, average prices can fluctuate dramatically, making the housing market appear unstable.

To demonstrate this point, let's look a couple of examples of how average prices are affected by various changes in sales patterns.

Example 1: How mean averages are affected by price changes

Sale Prices for Year 1 1. $139,000 2. 145,000 3. 230,000 4. 265,000 5. 290,000 median average 6. 320,000 7. 365,000 8. 425,000 9. 480,000 Total $2,659,000 ÷ 9 sales = $295,444, which is the mean average	Sale Prices for Year 2 2. $139,000 2. 145,000 3. 230,000 4. 265,000 5. 290,000 median average 6. 320,000 7. 365,000 8. 545,000 9. 580,000 Total $2,879,000 ÷ 9 sales = $319,888, which is the mean average *price change from Year 1
In this example, the mean average increased by 7.7 percent while the median average stayed the same. This shows that price changes at either end of the price scale affect the mean average, but can leave the median average virtually unchanged.

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Example 2: How median averages are affected by price changes

Sale Prices for Year 1 3. $139,000 2. 145,000 3. 230,000 4. 265,000 5. 290,000 median average 6. 320,000 7. 365,000 8. 425,000 9. 480,000 Total $2,659,000 ÷ 9 sales = $295,444, which is the mean average	Sale Prices for Year 2 4. $139,000 2. 145,000 3. 230,000 4. 290,000 5. 320,000 median average 6. 335,000 7. 395,000 8. 400,000 9. 405,000 Total $2,659,000 ÷ 9 sales = $295,444, which is the mean average *price change from Year 1
In this example, the mean average stayed the same while the median average increased by 9.4 percent. This shows that price changes in the mid-range section of the price scale affect the median average, but can leave the mean average virtually unchanged.

The above examples reveal that the spread of prices can create wide variances in both mean and median prices. Price changes at either end of the price scale affect the mean average; whereas, price changes in the mid-range section of the price scale affect the median average.

Neither of these price measurements take into account the changes in buying pattern — In year one luxury homes in the region are popular; the following year more modestly priced homes are popular. Both methods of price tracking can have the effect of overestimating the market price that home buyers are actually paying for their homes.

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Defining the "Typical Home"

The Housing Price Index is a more stable price indicator than average prices, because it tracks movement of "middle-of-the-range" or "typical" homes and excludes the extreme high-end and low-end properties. Typical homes are defined by the average home features sold in Greater Vancouver 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 HPI housing market, such as Richmond or North Vancouver.

For example, perhaps the basket of features for a typical home in a given community includes a 10-year-old, 3-bedroom house on a 7,200 sq. ft. lot, with 8 rooms, 2 bathrooms, a fireplace and a 1-car garage. 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 are estimates of current prices paid for bedrooms, bathrooms, fireplaces, etc. Prices for these 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.

An important note: The HPI offers only a benchmark in which to track price trends 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.

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Understanding HPI reports

Once key HPI concepts are grasped, reading online HPI reports can provide homesellers with a clearer picture of housing price trends. Homesellers interested in obtaining a more in depth knowledge of how the Housing Price Index works can read HPI formulas for Sellers.

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