The Problem with ‘Average’ Pricing

When someone asks how house prices are doing in a particular neighbourhood, the question seems easily answered. The big real estate boards all issue monthly price reports that spell out what the average selling price was in the previous month and how that compares to the month, and the year, before.

But there’s a problem with trying to divine market direction from average price data. It’s just too blunt a tool. If real estate–as the saying goes–is really about “location, location, location,” then average prices frequently don’t capture the reality of what’s going on in a particular city or neighbourhood. A collection of polaroids of houses by Amy Covington for Stocksy United

Calculating the average house price is as simple as adding up the prices realized for all home sales in a particular month and dividing by the number of sales. The problem with that metric begins to emerge, however, when one or more parts of the housing market don’t act in tandem with all the other segments, as they seldom do. For instance, what happens if the percentage of really expensive homes sold drops more than it does for other types of homes? That could lead to a big drop in the average selling price, even though the price of more moderate homes may be little changed.

If you are interested in a more accurate valuation of what is happening in your community, ask us to provide you with an HPI analysis (Home Pricing Index). This system uses a complex statistical model to measure the rate at which housing prices change over time by tracking price changes in ‘typical’ homes in each market.