News of falling house prices in Canada is really not that new. However, as the chart below illustrates, the extent of the drop in prices depends in large part on how they are measured.

One of the most frequently cited measures of house prices is published by the Canadian Real Estate Association (CREA). For the past 29 years, CREA has published sales data on existing residential properties collected by its members using the Multiple Listing Service (MLS®). Average sales prices are calculated based on the total value of MLS sales divided by the total number of housing units sold.

The CREA study makes no attempt to compare the prices of houses of similar size or type. Consequently, it is possible that house prices in one period could be different than the prices of houses in a subsequent period due to variations in size or type and not necessarily due to changes in demand. Since the CREA house price estimate is based on a very large number of sales (496,000 in 2008), the effect of variations in house type and size is reduced, although it is impossible to calculate by how much.

The two other house price indices published in Canada, Statistic Canada’s New Housing Price Index and the Teranet-National Bank House Price Index of existing single-family dwellings, both measure changes in prices of dwellings of the same or similar size and type. This approach minimizes the risk of comparing prices of different-size houses.

Until late 2007, all three measures of house prices told a fairly similar story. However, since peaking in November 2008 at +13% year over year, average existing house prices dropped by -9.2% year over year in February 2009, according to CREA.

Meanwhile, the Teranet/National Bank and Statistics Canada series exhibited much more moderate declines. Based on this comparison, our view is that house prices to date in Canada have fallen in the range of 5% to 7% year over year and it is quite possible that they could fall by as much as 10% year over year by mid year. Having said this, recent evidence of stronger existing home sales and stabilizing overall economic growth point to a possible firming of house prices by the end of 2009.

House Prices in Canada

Data sources: Canadian Real Estate Association (CREA), Statistics Canada and Teranet/National Bank. Chart: Reed Construction Data – CanaData.