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Everything You Need to Know About the MLS HPI

On February 6th, TREB finally released more information about the widely anticipated MLS HPI (MLS Home Price Index).  TREB, together with CREA and four other major boards across Canada developed this system together to measure home prices and home price growth in a more elaborate way than simple average.  If you’ll recall, our first blog was on Toronto Home Affordability (click here for the article) and it was based on a home price and income growth indices with 1977 as the base year.  The MLS HPI is very similar to this (I should have waited a few months before writing that article to save myself all the work!)

The MLS HPI is similar to the Consumer Price Index (CPI) used to measure Canada’s consumer price inflation. The base month/year is January 2005, where the indices are equal to 100. In January 2012 TREB’s HPI was 143.6, meaning prices grew up 43.6% between January 2005 and January 2012. TREB’s HPI was up 0.28% from December 2011, and up 7.6% year-over-year compared to January 2011.

Here’s how it works, pasted straight from TREB’s news release for simplicity:

Each month, there will be two key outputs published using the MLS® HPI:

1.       A series of price indices – The MLS® HPI price indices work in a similar fashion to the Consumer Price Index (Canada’s measure of consumer price inflation).  The indices have a base month/year of January 2005, where the indices are equal to 100.  In January 2012 TREB’s composite HPI was 143.6.  This means that the composite price index grew by 43.6 per cent between January 2005 and January 2012.  On a month-over-month basis, TREB’s composite HPI was up by 0.28 per cent compared to December 2011 and also up by 7.6 per cent year-over-year in comparison to January 2011.

2.       A series of benchmark home prices – The MLS® HPI has also been used to establish benchmark homes down to TREB’s Community level of geography for major home types including single family (detached and attached), townhouses and apartments.  A benchmark home is composed of a set of attributes typical of homes in the area where it is located, and remains constant over time.  This allows for an apples-to-apples comparison of price over time.

These numbers will be published in TREB’s monthly Market Watch publications in a new section called “Focus on the MLS Home Price Index”.  Below are some charts and graphs as well as some interesting Q&As found in TREB’s news release.

Q: How is the MLS® HPI calculated?

A: The MLS® HPI is calculated using multivariate regression analysis, a commonly used statistical technique.  Using a hybrid modeling approach that merges the Repeat-Sales and Hedonic Price approaches, the MLS® HPI model reflects contributions made by various quantitative and qualitative housing features toward the home price, including:

  1. Number of rooms above the basement level

  2. Number of bathrooms & half-bathrooms

  3. Square footage for main living & basement areas

  4. Whether it has a fireplace and/or finished basement

  5. Lot size

  6. The age of the property

  7. Parking

  8. How the home is heated

  9. Foundation, flooring, siding & roofing types

  10. Whether the property has waterfront or panoramic view

  11. Whether the property has been sold previously (newly constructed and previously unsold, or repeat sale)

  12. Proximity to shopping, schools, hospitals, police stations, churches, sports centres, golf courses, parks, and transportation (including the train station, railways, and airports)

The MLS® HPI can also be used to calculate the price for benchmark homes, whose features are typical of homes sold in a given area.

Q: What is a benchmark home?

A: A “Benchmark home” is one whose attributes are typical of homes traded in the area where it is located, with one benchmark being generated for each supported sub-area and home type.

Benchmark property descriptions are based on median values for quantitative property attributes (e.g. above ground living area in square feet), and the most commonly occurring value (i.e. modal value) for qualitative attributes (e.g. basement is not finished).

The attributes of Benchmark homes remain constant over time, allowing for an apples-to-apples comparison of price over time.

Q: How is the MLS® HPI different from average and median home price calculations?

A: The MLS® HPI is based on the value homebuyers assign to various housing attributes, which tend to evolve gradually over time.

This means that price changes calculated using the MLS® HPI are less volatile than those derived using common measures like average and median, which can swing dramatically in response to the changing mix of home sales over time.  

It is often difficult to determine if average or median price fluctuations really reflect changes in buyers’ willingness to pay for certain housing attributes, or just changes in the volume of very expensive or inexpensive home sales from one time period to the next. The MLS® HPI removes that uncertainty.

Q: How can the MLS® HPI be used with average and median prices?

A: Comparing the MLS® HPI value for a given home type in a given market with the average selling price for the same home type and market can provide useful insights.

For example, if there is a change in the average home price that is well above the change in the MLS® HPI value, it may point to an increase in the proportion of high-end homes sold during a given period.

MLS HPI CHART JANUARY 2012
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