What a home price benchmark tells you
THE HOME GUIDE · 15
What a home price benchmark really tells you
A home can sell below its asking price and still cost more than similar homes. Here's how to tell.
ABOUT 7 MINUTES TO READ
Imagine a home listed for $900,000. It sells for $850,000.
That's $50,000 below the asking price. It sounds like a good deal.
But what if similar homes in the area are now worth closer to $825,000?
The buyer paid less than the seller asked. That alone doesn't tell us whether the price was good.
THE QUESTION THAT MATTERS
How does the price compare with what similar homes are worth today?
01 / UNDERSTANDING THE NUMBER
What is a benchmark price?
A benchmark price is the estimated price of a typical home in a certain area.
The model looks at features such as home type, size, age and other details that can affect price.
It then tracks how the value of that kind of home changes over time.
A benchmark helps you see whether prices for a certain type of home are rising or falling. It doesn't tell you the exact value of any one property.
In Canada, this information is tracked through the MLS® Home Price Index, often called the HPI.
02 / AN IMPORTANT DIFFERENCE
Average price or benchmark price?
The two numbers measure different things.
AVERAGE SALE PRICE
What sold this month?
Add up all the sale prices and divide by the number of homes sold. If more expensive homes sell, the average can rise even when prices for similar homes stay the same.
BENCHMARK PRICE
How has a typical home's value changed?
A statistical model looks at home features and sale data. This makes it easier to compare the same kind of home over time.
Both numbers can be useful. The benchmark is often better for studying how prices have changed.
03 / THE BIGGER PICTURE
The price change you might not notice
Let's use made-up numbers for a typical townhouse.
BENCHMARK PRICE COMPARISON
Earlier benchmark
$1,000,000
Later benchmark
$850,000
The benchmark is $150,000 below the earlier level.
Illustrative figures only. These are not actual market statistics.
Now imagine a townhouse listed at $890,000. A buyer negotiates the price to $850,000.
The buyer has negotiated $40,000 below the asking price. But the wider market may already have moved down from earlier levels.
That larger change matters when judging the deal. The benchmark also needs to match the home's area and type before you use it for comparison.
04 / TRY IT YOURSELF
Which number would you trust?
Use these questions to test how you read housing prices.
A city's average price rises 8%. Did every home gain value?
No. More expensive homes may have sold that month. Check the benchmark for the same area and type of home to get a clearer picture of the trend.
A home sells 10% below asking. Was it a bargain?
Maybe. The seller may have asked too much. Compare the final price with recent sales, the home's condition and the local benchmark trend.
The benchmark falls 5%. Did your home lose exactly 5%?
Not necessarily. A benchmark follows a typical home. Your property may have different features, repairs or location advantages.
05 / READING THE INDEX
What does an HPI number mean?
The HPI is also shown as an index number. Its starting level was set to 100 in January 2005.
ILLUSTRATIVE INDEX
100 → 300
An index of 300 means the model's benchmark value is three times its January 2005 level. That's an increase of 200%.
You can also compare two more recent index numbers.
If an index moves from 300 to 285, that is a 5% drop. It tells you how the benchmark has changed over that period.
You do not need to learn the full math to use the HPI. Look at the direction, the size of the change and the dates being compared.
06 / USE IT WISELY
A benchmark is a starting point, not a price tag.
Suppose the benchmark for a typical detached home in an area is $1.2 million.
That doesn't mean every detached home in the area is worth $1.2 million.
A larger lot, busy road, finished basement or costly repair can change what buyers are willing to pay.
The HPI is designed to track price trends. It is not a home inspection, a formal appraisal or a guarantee of what a property will sell for.
Five things to check before trusting a price
1. Is the number for the right neighbourhood?
2. Does it cover the same type of home?
3. Is it an average, benchmark, asking price or sold price?
4. What period does the number compare?
5. What do recent sales of truly similar homes show?
A good price decision needs context.
A benchmark tells you where prices have moved for a typical home. Recent sales help show what buyers have actually paid.
Understanding both can help you ask better questions when buying, selling or simply keeping track of your home's value.
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