Disproving the HPI?
December 22, 2012
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I have been very skeptical of the HPI because these 0.1% drops just don’t seem to match the reality of the situation so I’ve been hoping to somehow get my hands on a large enough sales data set where I could prove that this number is massaged and manipulated as much as the other numbers that are thrown out by the industry each month. The data set I was able to work with included most of the apartment sales in Vancouver West for the last 10 years although unfortunately not including 2012.
Crunching the data using the methodology they use in the calculation is a lot of work but the workflow looked something like this:
- Identify all the units that have sold multiple times in the data set
- Any units that had more than one sale in the same year had those 2 sales merged into a single sale with the average of the 2 prices. I was only concerned with year to year HPI changes so this was a good enough estimation of the average selling price
- Starting back at the first year find any units that sold in both 2000 and 2001 and take the median price difference as the HPI increase for the year. This value is then applied to every other listing that sold in 2000 but not in 2001 to set a new 2001 approximated value
- Repeat step 3 for each additional year finding units that sold in that year (2002 for example) and compare that to the HPI adjusted (or last year selling price if valid) then take this median value as the HPI and apply to all the listings that had a value at that point – etc, etc
The end result was that the numbers were very close – close enough for me to conclude that the feeling I had in my gut that this number is completely inaccurate is actually more conspiracy theory than fact. It is really too bad that I didn’t have the same data for 2012 because that would be more telling but given that 2008 / 2009 seemed accurate I’d expect the same now.
However, there is still an issue with it. How many people do you know who have lived in an apartment or home have spent money upgrading, renovating, rain screening, special assessmentizing etc etc during that time? Just about everyone I would imagine. A 20% gain in HPI for apartments over a period of a few years essentially means that the average apartment sold for 20% more but how much did the average apartment spend on updates, new appliances, repairs, special assessments etc? In reality the apartment that is being bought 5 years later is generally better (through expenses the owner paid for) than the same one that sold 5 years earlier. So this isn’t like looking at a stock price over time or an ounce of gold. It seems like a small difference but the impact can be pretty large in making the HPI look bigger than it really is.
As a final comment, when going through the HPI values for Vancouver West Apartments I discovered something that might be shocking, at least it was to me. The current HPI for Vancouver West Apartments is the same as it was at the 2008 peak in April… That’s over 4.5 years with a return of 0%. I’ll be doing some more HPI related analysis in the future so stay tuned.