Not so bad as the media would have you believe

House prices in Canada are falling. Pick up any newspaper, turn on any t.v. station and you hear the chorus of "Chicken Little" reports. But is it really all that bad?

Simply looking at the headline numbers can be very misleading. I can't really fault them for not taking a step back to see the big picture and analyzing the information.

I want to look at 2 things. Firstly, it was (up til recently) a common saying that the real estate market is "in the 12th year of a 7 year cycle". Nothing could go wrong. Remember those days? They weren't that long ago.

So if year after year, prices were pretty well guaranteed to go up AND this went on for longer than the usual cycle then any drop is cause for concern since it has been ages since the last drop and we have very short memories.

Further, a drop off of a record year (preceeded by a record year which preceeded a record year which ... well, you get it right ?) is a little unfair to compare to the end of days. Prices have dropped significantly in many markets. But, when the drop is from a record high then the bottom stability point should still be higher than where the cycle began. Sounds like the common wisdom about the stock market, doesn't it?

Secondly, and I won't get into heavy math (don't worry, I wouldn't do that to you) ... the "headline" numbers so often referred to reflect a current weighting for each city. This makes for a huge bias to the overall average price. So its not difficult to see that a drastic change in the sales volume in certain cities - Vancouver or Toronto for example - can significantly influence the average price on a national basis.

Let's look at Vancouver. The year over year drop is almost 45% when talking about the number of homes sold in the city. Ooh that's terrible! Now let's start qualifying that for a minute and add in that Vancouver prices are much higher than the national average. By combining these 2 facts, it looks like national home prices fell just as sharply when in reality, the driving factor was that fewer expensive homes were being sold in Vancouver. It may seem like a big market out there but really they are just a fraction of the marketplace on the whole.

So what do we get from all this? Nationally, the numbers are down by about 6% year over year for October but by using proper weighting, home prices really fell by closer to 1%.

So while we agree that in general prices are falling and are expected to continue trending downwards, the headlines are exaggerating the real weakness in the housing market by not taking all factors into account and explaining the weighting certain markets have on the whole picture.