What Real Estate “Micromarkets” Really Mean??

Posted by: Elise Stern, Created date: January 31, 2013

What Is A Real Estate Micromarket?

Put simply, a micromarket is a piece of the market that has its own specific real estate trend; it can be a particular neighbourhood, a particular school district, even a particular price point. Any way you can slice the statistics can be considered a micromarket. And really, every home is part of a micromarket – or more than one.

When you hear about a “hot” neighbourhood where homes are selling for many thousands of dollars over asking even in the midst of a market slump, or a price point at which homes are sitting on the market for months even though other homes in the same area at a different price point are selling like hotcakes, you’re dealing with the intricacies of a micromarket.

Let’s say, for instance, you’re looking for a home in a Toronto neighbourhood that includes districting for two different elementary schools. The line between one and the other bisects a street. One school is considered much more desirable than the other, and so homes on one side of the street – in the desirable district – can go for tens of thousands of dollars  more than similar homes on the other side. If you don’t know the area well, you’d never guess, but if you have young children and you want them to go to your preferred school, you need to know – and to pay that premium.

Similarly, let’s say you’re looking for a 4-bedroom home for around a million dollars, and you’re fairly flexible as to where in the city you’d like to live. In some areas, 4-bedroom  homes for one million dollars are almost impossible to find because they are both rare and very popular, and they’re always subject to bidding wars. In other areas, almost all homes are 4-bedroom million-dollar homes, and you’d have less competition (and may pay less) – and in still other areas, you might be able to spend $700,000 on a 4-bedroom fixer-upper and use the extra $300,000 to make it into your dream home. Each of these neighbourhoods will have different benefits and drawbacks, and you will need to work with an agent who knows each neighbourhood very well to help you figure out which is your best bet.

The Problem with “Average Prices”

As a thought experiment, let’s consider the price of cars. If we say “the average price of a car in Canada is $20,000″, for instance (it isn’t, but let’s use this number for the sake of argument), it gives us some valuable general information about the auto market in Canada. If the average price of a car rises or falls, it gives us information about the health of the auto market overall, and when taken with average statistics from other industries, may even give us a clue as to the overall state of the Canadian economy.

What it doesn’t tell us is any specific information about our car purchase. It doesn’t tell us what a Buick or a Hyundai or a Mercedes costs, what we might expect to pay for a tiny hatchback or a pickup truck, or whether prices are different in Edmonton or Kelowna or Toronto. And although average prices give us a fairly decent indicator as to what we might pay for a car whose list price is closer to the average, the further we get to the lower or higher end of the scale, the less useful this information is to us. Knowing that the average car price in Canada is $20,000 won’t help us decide whether to pay $500 or $600 for that 1982 Tercel on Autotrader, and it won’t help us bargain the Bentley down to $250,000 from $275,000.

The same is true for homes. Average prices, like those put out by the Toronto Real Estate Board, can help us understand the general health of the Toronto real estate market, and averages for each type of home can help us figure out what the market as a whole is doing. But you’ll have to look at the specific statistics for each area of the city to really understand what’s happening in a particular neighbourhood – and even so, many micromarkets are smaller than these area boundaries, span one or more boundaries, or are more complex than these boundaries suggest because of factors like school districts, distance to transport, even proximity to noisy train tracks. There’s a limit to how much numbers can do here.

The real estate research company RealNet has tried to sidestep the issue of averages by creating an “index price”, based on calculations that take into account the intricacies of the market, as has the MLS with the MLS Price Index. This is very helpful, both to real estate agents and to buyers and sellers, who use the information to understand more completely the direction of the market and some of its sub-categories (such as the low-rise/high-rise divide identified by RealNet and discussed in the Globe and Mail today.)

However, the fact remains that on the level of individual sales, when you’re actually trying to buy or sell a home, real estate works in micromarkets – which is why you need a realtor who knows your specific market well.

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