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Winnipeg real estate signsJohn Woods/The Globe and Mail

The Canadian Real Estate Association is developing a new way to measure the health of the country's housing market as it seeks to replace its decades-old method of reporting average sale prices with something that more accurately reflects market conditions.

While the average sale price is a good way to see what's happening in the national market, it can be skewed by high prices in Vancouver and Toronto. The industry association wants to create an index that adjusts for that bias, is more reflective of the overall market and is less prone to short-term fluctuations.

"Average sale prices can be overly influenced by larger cities, so if you get a big price swing in Vancouver it can really make a difference in the national price," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "Having said that, average prices have the huge benefit of being timely and they have done a good job of capturing the turns of the market."

CREA is developing its index with Altus Group Ltd., a Toronto-based company that specializes in real estate research and data, and hopes to have it ready for the market in the new year. Neither party would comment.

The real estate association is considering the model used to generate the Standard & Poor's Case-Shiller national home price index, which measures market activity in the United States each month. That index only includes houses that have been sold more than once, and measures the difference between the two sale prices.

If a house's value increases (or decreases) because of anything other than market conditions - because of renovations, for example - it is not included in the survey. The main criticism of the Case-Shiller index, which also publishes separate reports on 20 American cities, is that it lags the market by two months. So in December, it is reporting on what happened in September.

In a recent interview, CREA's chief economist Gregory Klump said that average prices can be a difficult way to measure a market's health. He said the wide variation in prices through the recession and recovery caused "a major skewing of average prices."

"Average prices are an important metric so long as you keep it in perspective and look at it over longer terms," he said. "And you have to look at why it is moving. It can be a funhouse mirror looking at average price changes - it's a distortion of reality."

A Canadian alternative to the Case-Shiller does exist. The Teranet-National Bank house price index examines prices in six Canadian cities, and uses similar filters to screen out anomalies. Originally developed to allow the bank to sell derivatives linked to the housing market, it is now released publicly every month, albeit with the same two-month delay as the Case-Shiller.

"We created it to trade financial products linked to house prices," said Simon Côté, managing director of property derivatives at National Bank Financial. "For example, a house developer may want to protect against prices falling, or a pension fund may want to gain exposure to real estate so we can build them a product."

Because the Teranet-National Bank index only looks at six cities, the numbers can occasionally conflict with the average prices used by CREA. The difference can cause some headaches for economists and anyone trying to understand where the market is going, Mr. Porter said.

"Right now we have numbers that often don't line up well at all," he said. "Anything that can improve that would be a welcome addition."

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MEASURING THE MARKET

S&P Case-Shiller index

The S&P Case-Shiller index measures U.S. house prices. There are actually several indices, but the most cited are the national sales index and a 20-city index. Released each month, they lag the market by two months. The index includes only data for houses that have been sold more than once, with the difference between both sales being added to the data set.

Teranet-National Bank House Price Index

This index of six Canadian cities (Ottawa, Toronto, Calgary, Vancouver, Montreal, Halifax) was created so investors would have a way to measure the housing market, and create derivatives based on its movements. Like the Case-Shiller, it is on a two-month delay and includes only houses that have been sold more than once. The methodology eliminates variations based on the type of properties sold (for example, during downturns, smaller properties tend to trade more, pulling down the average price more quickly than house prices are actually decreasing).

Canadian Real Estate Association

On the 15th of each month, the CREA releases the national average resale price for the previous month. It compiles all data from sales that took place on its Multiple Listing Service. The average resale price in October, the most recent month reported, was $337,842. It also releases a weighted average price, which attempts to account for provincial differences (it was $333,963 in October).

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