Are Prices Really UP?

In BC total housing sales are down, inventory of places for sale is up ….and prices are up?.

This flies in the face of what we are used to seeing in our traditional markets which were strictly Supply vs Demand driven.

If supply is high and demand is low then prices drop. Likewise, if supply is low and demand is high then prices rise.

In an attempt to make sense of this, one must first consider the way statistics are reported. We all know the problems with using ‘average’ prices – where the price fluctuation from month to month depends on the price range of homes being sold. A month in which multi-million dollar homes selling will skew the averages up versus a month in which several cheaper homes are sold.

Similar to this – but a little more reliable – is using ‘Median’ prices to determine a rising or falling market. Here, a middle sale amount is chosen where 50% of the sales are above this number and 50% of places sold are below this number.

Here we can usually see a market shifting  – especially if there is a change to the demand side such as the government suddenly changing the rules around mortgage qualifications.   However, as with average prices, median values are also going to be affected by the price ranges of homes being sold in any given month.

This brings us to the Housing Price Index (HPI) – which operates the same way the Consumer Price Index works – taking a typical basket of goods (called a benchmark home) and monitoring the changing value of that basket or home.

The definition of a “typical” benchmark home takes into account various property attributes – above ground living area, age, lot size, # of bedrooms, bathrooms, covered parking etc. as well as its proximity to amenities.

However, what it does not take into consideration is the condition of the home.  Suppose the benchmark home in Coquitlam is defined as a 35 year old 2000 square foot, 3 bed – 2 bath home on a 7200 sq ft lot.  Also suppose that there are a number of these homes for sale – such as there is currently. Also suppose that demand is down (currently sales are down almost 40%).

The reality of our market right now is that the 35 year old properties that are selling for good prices are the ones that have been renovated – either partially or completely. And it is those renovated homes that are selling before the un-renovated homes…..and selling at prices higher than the ”benchmark” price.

Conclusion: when we see a report stating Benchmark prices are 2-3% higher than they were in July of 2017 one consideration must be given to the age and condition of the benchmark home as well as the market conditions today versus a year ago.  I am sure you will remember last year with a supply of houses so low that even ‘garbage ‘ properties were selling within 2 weeks for full price or more.

Today, if a homeowner spends $60,000 renovating their 30 + year old home, they can expect to get a substantial portion of that back on the sale price. Therefore it will sell higher than a similar home with no renovations and higher than a ‘benchmark’ home.