If you want to know what the future holds, you need to look to the past. Well, according to most economists, anyway. And, for many of us, year-over-year comparisons are a popular way to start. But, be warned, while they may have their advantages, they aren’t perfect.
The good: Consider Canadian home sales, which are generally stronger in the spring than in the winter due to seasonal influences; accordingly, sales activity can be expected to be stronger in May versus December. Year-over-year comparisons avoid issues associated with seasonality, are easy to grasp, and can be a useful tool to identify a legitimate improvement or decline in the data.
The not-so-good: Other factors that can affect data are the number of trading days in a month. Most home sales take place between Monday and Friday; all other things being equal, if the month being compared has a greater number of weekdays in one year versus the next, it will have a greater number of sales. Year-over-year comparisons do not take into account differences in the number of trading days, so increases or decreases in activity can be affected by trading days.
The bad: The biggest pitfall of year-over-year comparisons is that they provide no context for other factors that may have been at play in the market during each period, or how each point compares to “normal” levels.
This has been a recurring issue in Canadian housing data over the past few years, with tighter mortgage regulations causing an increase in home sales before they came into force and a subsequent decrease once they did. This was the case with the most recent tightening of mortgage regulations that came into effect on July 9th 2012, causing home sales to be restrained over the rest of the year, particularly from August to October.
And while national activity has since returned to levels in line with the 10-year average, because of that weakness in the autumn of 2012, year-over-year comparisons look stretched and have the potential to be misinterpreted as massive increases when, in reality, sales have merely returned to average levels.
The point is: without context, year-over-year comparisons risk skewing perceptions about how the housing market is actually performing. It’s important to make use of a number of tools to analyze data, including comparisons based on seasonally adjusted data, year-to-date statistics, and longer term averages in addition to simple year-over-year comparisons. Of course, the best way for property buyers and sellers to get the most accurate picture about their local housing market is by talking to their REALTOR®.