The price of new homes in Canada continues to increase at a strong rate, according to Statistics Canada. In releasing its latest New Housing Price Index(NHPI), this federal research body revealed an increase of 2.6 percent in the year since March 2000. This was the highest annual increase in the New Housing Price Index since May 1990, when the Index advanced 3.8 percent.

NHPI is a scale of price movement that reveals differences on a monthly basis and, therefore, price changes can be compared on an annual basis as well. The New Housing Price Index, a component of the Consumer Price Index, helps investors, market analysts and buyers decide whether this is a good time to invest in new homes.

This index of new home builders' selling prices measures price changes, not price levels, in 22 cities across Canada. As well as the major city in each province, significant urban centres like Saskatoon, Sudbury-Thunder Bay, Hamilton and Kitchener-Waterloo are included in the Index.

On a year-over-year basis, Ottawa-Hull posted the largest increase (+14.2%) for new homes across the country followed by Montreal, Halifax and Kitchener-Waterloo. Increases were in part attributed to higher prices for building materials and labour.

In each city, selected new home builders provide details on price and home features for contracts they have signed with buyers. These properties are not typically sold on the Multiple Listing Service so detailed sales information is not available elsewhere. New residential homes are lumped together in one index which combines housing data for single detached houses, semi-detached homes and row housing.

"The mix is judged to be representative of what is happening in a city," explained Albert Near, Head of Housing and Input Price Indexes for Statistics Canada. "We actually survey builders and have a representative sample of builders in each city. They choose a representative sample from the homes they sell and give details on those homes. We then aggregate all models for all builders."

Builder indexes are aggregated into a city index and city indexes in turn are aggregated into a national index using weights that reflect the volume of residential construction activity in particular cities during the preceding three years. The New Housing Price Index also takes changes in quality into account.

"If this month, the price for a home is $150,000--the same price as last month--but in the first month a fireplace was included in the price and now buyers must pay extra for the fireplace, there has been a change in quality," said Near, explaining the quality-adjusted NHPI. "If there is no price change, but quality changes, prices have gone up. Consumers may not realize that they are getting less if the price is the same but builders are deleting features."

This example illustrates the importance of doing your homework when buying a new home. Knowing the pattern of pricing and inclusions for a specific housing development can help buyers negotiate the best price and the most new home features for their needs.

There are three indexes for each city:

  • One refers to house plus land and involves the contracted price a buyer pays for a house and the land it is on;
  • A separate index represents builder land cost estimates;
  • The residual index (selling price less land) relates to the current cost of the structure.

This breakdown into three indexes is obviously hypothetical since you cannot buy a house on its own, however, it is valuable in analyzing whether construction costs or land values are driving up prices.

"We are saying "Here it is'," said Near. Statistics Canada "puts the numbers out and says that's the way they are. People can make their own decisions."

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