Interpreting Sunshine Coast Real Estate Sales - The 3 Amigos

[Skook]

(I don’t know what is more challenging - grappling with the meaning of life or trying to prepare this next post. I have gone through a number of revisions to both text and charts in my attempt to understand the concepts of Home Price Index and Benchmark Price. I am not sure I’ve got a handle on either but it’s time to give it my best shot.)

Benchmark Price (BMP)

As a means of explaining the MLS HPI and Benchmark Price, I had planned to quote from the MLS HPI 2012 Realtors Guide. However, for brevity’s sake, here is the link to that .pdf document (courtesy Yatter Matters). Instead, I will quote from a January 23, 2012 posting by Calgary Realtor Mike Fotiou who I think presents a satisfactory interpretation of the Guide’s definitions and some concrete examples:

Quote:We’re happy to say that the MLS® Housing Price Index (HPI) is coming to Calgary in February [2012], as part of a nationwide roll out involving boards in Canada’s largest cities. This new monthly price measure will enable us to better determine real price changes.

For example, many agents have experienced a scenario where the monthly average price increased by 5%, and our clients say, “Prices increased, shouldn’t my house be worth more?” The 5% increase is often misinterpreted, and could be caused by a number of factors including a rise in luxury home sales. As average prices can be skewed by the composition of sales, it does not reflect price trends based on the type and features that a home provides. [Skook Note: this is the issue I raise and illustrate in my first post above]

The index will help as price trends will reflect changes caused by individual’s willingness to pay for home attributes.

What does this mean for those working with REALTORS®?

By using MLS® HPI, we will be able to offer more comprehensive and purer data than ever before – data you can use for property comparisons, understanding future price trends and estimating current market values. So how does it work?

The MLS® HPI is calculated using a sophisticated statistical model that estimates home prices based on their quantitative and qualitative features, including:

• Number of rooms above the basement level
  
• Number of bathrooms and half-bathrooms
  
• Square footage for main living and basement areas
  
• Whether it has a fireplace and/or finished basement
  
• Lot size
  
• The age of the property
  
• Parking
  
• How the home is heated
  
• Foundation, flooring, siding and roofing types
  
• Whether the property has a waterfront or panoramic view
  
• Whether the property has been sold previously
  
• Proximity to shopping, schools, hospitals, police stations, churches, sports centres, golf courses, parks, and transportation (including train stations, airports etc.)
  

Upon valuating these features or attributes the index and the benchmark price are formulated.

MLS® HPI Benchmark

A ‘benchmark home’ is one that shows a set of attributes typical to the area/sub-market where it is located. Since ‘typical’ homes are different from one area to the next, their descriptions differ between areas. The typical home for each community will remain constant over time, indicating that attributes will not change.

For example, the following table outlines some of the attributes that comprise a typical home for each of the following [Calgary] communities: [Hawkwood, Edgemont, and Mount Royal]. The MLS® HPI benchmark price is calculated by taking the values determined by the model and applying it to these attributes for the ‘typical’ homes in each area. The value of these attributes is generated based on geographical groupings where the sales that have occurred are similar to each other, i.e. “homogeneous”.

As noted in the table above, the price of a two-storey home and its attributes vary from each community as do the trends in pricing. This type of monthly summary report will include each community by property type and will be available after the HPI launch in February.

Let’s take another look at the Sunshine Coast July 2013 data keeping in mind the 2012 Realtors Guide and Fotiou explanations.

The table shows data for Residential/Composite (SFD, Condo/Townhouse and Apartment Sales) and for Single Family Detached alone. We are given a ‘Benchmark Price’ for both and a ‘Price Index’ figure. As well, we are shown how the Price Index has changed vis-à-vis the preceding month (June, 2013), over three months (May, June, July, 2013), over six months (Feb-July, 2013), over one year (July, 2012 & July, 2013), over three years (July 2011, July 2012, July 2013) and over five years (July 2009-July 2013). Note that it is only one month (July) that is being compared in those 1, 3, and 5 year figures. As we can see, the SC is showing negative results across the table.

Concentrating on the Single Family Detached data, let’s see how the Price Index figure (118.7) was calculated. First, we have to go back to January, 2005 and find the Sunshine Coast SFD Benchmark Price. I turned to this Vancouver website for the REBGV historical monthly stats packages dating back to 2001.

Now, when you open up the January, 2005 package you will discover that there is no Benchmark price data - for any area of the REBGV! January is the only month in 2005 that is missing that information. Right, so I pulled the Benchmark SFD price from December, 2004 ($283,630) and February, 2005 ($287,334) added them together and divided by two, so January, 2005 = $285,482.

The next step is to calculate the ‘percentage change’ between the July, 2013 and January, 2005 Benchmark Prices and there is a tidy little formula for that (thank you, Microsoft!):

% Change = (New price/Original price)-1 = ($338,800/$285,482)-1 = 0.1867 x 100 = 18.7%

Then, drop the percentage sign and add 100 and you have the HPI = 118.7 and this would be interpreted in the following way: the Sunshine Coast single family detached home Price Index in July, 2013 was up 18.7 points compared to January, 2005 (base year =100)

To visualize the HPI over time, I have pulled the data going back to January, 2012 and created both a table and chart. I did not go back any further because prior to that date the REBGV used a different methodology for calculating the HPI and this methodology changed with this February 2012 “roll out” that saw other RE Boards in Canada adopt the MLS Home Price index. As well, the base year changed from January, 2001 to January, 2005 (The January, 2001 base year was used from 2004 - 2012 and prior to that the base year was January, 1991). The REBGV does offer a guide explaining the HPI ‘methodology’ and you can access that .pdf document here - have fun!

The HPI chart with its trendline now helps to explain why the July 2013 Home Price Index table above presents those negative percentage changes over those different time periods in the last year.

Okay, so we can see that although the HPI is still well above the base year, it has been falling since April, 2012 which means the price for a benchmark house on the SC is also falling. So, I have pulled the SC Benchmark Price going back to January, 2010 and created a table and chart. I went back to 2010 because I realized that it was in July, 2010 that the SC Benchmark Price reached its peak - the highest level it has ever obtained. The graph line is in two colours to emphasize before and after this peak.

Now, there is a question raised here - when the HPI methodology changed did that affect the benchmark price, too. I do not know. My calculation for the January, 2005 Benchmark Price was correct - it gave me the right HPI for July, 2013 so I have gone ahead and concluded that the historical benchmark prices work. The data in 2011 appears to fit in well with 2012 figures.

I added a trendline for the period of July, 2010 (the peak) to July, 2013. For fun, I extended the graph to see where the trendline crossed the base line if it maintains its present course and in the close-up image on the right you can see the date is April, 2015. This will be interesting to follow.

However, the most important message illustrated by the graph is that the benchmark price has dropped 21.6% (-21.6%) in the span of three years - since the July, 2010 peak. It is a message that I am sure sellers on the Sunshine Coast are completely unaware of given the number of listing price drops month after month. Through incremental drops, they are attempting to chase down a selling point that has dipped far, far lower than anyone realizes - except the buyers. This past July's benchmark price was last seen in November, 2005!

Finally, the bunching up of benchmark prices along the trendline after April, 2012 caught my eye which is why I took a close-up image that you see to the right of the chart. The month of June stood out at me and I asked myself did something happen here? A thought came to mind and I went on a search and here is what I found on the CBC news website - the date was June 21, 2012

to be cont'd...