According to statistics released today by The Canadian Real Estate Association (CREA), the MLS® Home Price Index, the leading measure of Canadian home prices, increased in May 2012.
The MLS® Home Price Index (MLS® HPI) rose 5.2 per cent from April to May 2012. Year-over-year gains had been slowing through the end of last year and have stabilized at close to five per cent so far this year.
The MLS® HPI posted the largest year-over-year increase in Greater Toronto (7.9%), followed by Calgary (4.8%), Greater Vancouver (3.3%), the Fraser Valley (2.4%), and Montreal (2.2%).
Year-over-year price gains again picked up speed in Calgary, with May marking the largest year-over-year gain there in nearly two years. The increase lifted the MLS® HPI for Calgary to its highest level since August 2008.
By contrast, year-over-year gains continued to shrink in Greater Vancouver and the Fraser Valley. Price gains in Greater Toronto and Montreal held their ground in May compared to April. Greater Toronto also remains the hottest market tracked by the index, with single family homes in its urban core continuing to sell briskly.
“While price gains overall are running steady, diverging trends among local markets show clearly that all real estate is truly local,” said Wayne Moen, CREA President. “Because price trends are different between markets and within them, anyone buying or selling a home should consult with their REALTOR® to best understand how the housing market is shaping up locally.”
Among the Benchmark housing types tracked by the index, two-storey single family homes continued posting the strongest year-over-year growth in May (6.7%). Gains for one-storey single family homes (5.8%) also surpassed the rise in the overall index, while townhouses and apartments saw more modest gains (3.3% and 2.95 respectively).
“Home price gains in Greater Toronto continue to eclipse those in other markets. Gains are also starting to pick up speed in Calgary after months of stability,” said Gregory Klump, CREA’s Chief Economist. “As always, prospects for home price trends depend on buyers’ willingness to pay and sellers’ expectations and motivations, both of which are tied to economic, labour market, and interest rate prospects. With European sovereign debt and banking issues likely to cloud the global economic outlook, Canadian interest rates will remain at or very near current levels. The continuation of low interest rates will continue to support Canadian housing activity and prices for some time to come.”
In focus: The MLS® HPI and Canadian home price valuations
The MLS® HPI outperforms other measures of Canadian home prices, including other popular home price indices, medians, and averages.
While the MLS® HPI is highly correlated with other price measures, it enjoys a number of advantages. Among these advantages is that it takes into account contributions that a home’s quantitative and qualitative features make toward its sales price, including whether or not a home has been renovated. This is an important consideration given the significance of Canadian home renovation expenditure each year.
Unlike average and median prices, the MLS® HPI is not distorted up or down by changes in the mix of sales. Consider the period from pre-recession peak until the present for the MLS® HPI as compared to the average price for the aggregate of the same five markets.
The MLS® HPI fell 8.4 per cent from its pre-recession peak to the bottom of its recessionary trough. The average price, by comparison, dropped 14.2 per cent. From the trough reached more than three years ago, the MLS® HPI has since climbed 23.7 per cent, while the average price has climbed by almost double that (40.2 per cent) due in large part to compositional factors in Vancouver and Toronto.
From a starting point of January 2005, average and median prices fell further during the recession and have since then climbed by more than the MLS® HPI.
This is important, since the ratio of price to income now compared to its long-term average is often used to gauge the extent to which Canadian homes may be considered as overvalued. Inferences made using this ratio based on distorted average price data may be tenuous.