30 Nov 2017
Median Property Prices - Why You Should Take Them With A Grain Of Salt

Median Property Prices - Why You Should Take Them With A Grain Of Salt

Median Property Prices - Why You Should Take Them With A Grain Of Salt
Guid,Tips,Selling,Auction real estate agents

While median house prices are one of the most cited property market statistics as with any single measure there are some shortcomings that investors need to understand in order not to be misled.

So here’s five things you need to understand before you draw any conclusions from the regularly reported changes in median prices.

1. How is the median price calculated?

The median house price is essentially the sale price of the middle home in a list of sales where the sales are arranged in order from lowest to highest price.

So in a list of 11 sales, it would be the sale price of house number 6, which has 5 lower priced sales below it and 5 higher priced sales above it.

This is different to the average, which would be the total value of all the house sales, divided by the number of homes sold.

Technically speaking, the median is more accurate than the average because it is less affected by a few unusually high or low sale prices.

Median prices in property are based on the homes that have recently transacted, and are most often divided into units and houses.

2. A change in the median price does not necessarily mean a change in your property’s value

While median prices are a useful tool for understanding the price changes of properties that have transacted in a market, a 10% increase does not necessarily mean that your property is worth 10% more.

In fact, your property could have dropped in value during this time.

What it does reflect, however, is activity in the market:

  • If a number of multi-million dollar homes came onto the market and all sold the last month this would raise the median price – however the value of your more moderately priced home may not have changed at all.
  • Similarly a falling median price in an area could really just indicate that there were more sales occurring at the cheaper end of the market than there are at the expensive end.

Let’s assume there were five home sales in your suburb last month as follows: $460,000, $525,000, $550,000, $570,000 and $620,000. In this instance, the median would be $550,000.

Now let’s assume that a year later 3 of these same properties go back onto the market and are resold for exactly the same price as they sold a year earlier (these properties are the ones with a price of $460,000, $525,000 and $620,000).   

With these three sales, the median price is now $525,000 – $25,000 less than the median price a year earlier.

However, as you can see, each of these houses did not lose any value when they were re-sold.

Clearly the sample of sales here is small and not statistically significant.

The point I’m trying to make is that to really understand what’s been going on you’ll need to look deeper into the sales that occurred over the period in question.

Scrutinising the types of properties that sold the previous month compared to the new data can be helpful – you might notice that those selling last month were primarily 3 bedroom brick houses, where this month more prestigious homes were selling.

This may suggest that the uptick in the median price isn’t a sign that your property is increasing in value.

3. Median prices are a more valuable indicator in some areas than others

Changes in median price statistics are more meaningful in determining property price growth in some areas than others.

For instance, suburbs where the properties are largely homogenous and therefore of similar pricing are likely to see the median price as a more accurate reflection of true value changes.

And suburbs where many properties transact on a more regular basis will also be more statistically meaningful than in areas where homes are tightly held, sell infrequently and are significantly different from another.

Similarly, some suburbs are far too large for the number to be meaningful – with good and bad locations on different sides of a main road that don’t perform similarly being lumped together.

Likewise relying on median price changes at a capital city level is too broad and can be misleading.

4. Different data providers measure different statistics

Ever wondered why different data providers’ median prices are different?

That’s because there are three key differences between all the providers:

  • The data they collect,
  • The time frames they report on – daily, monthly or quarterly
  • The accuracy/complexity of the index methodology they rely on.

5. Statistics are more reliable if looked at over the long term

Investors should pay less attention to short term trends and understand that median prices (as with all statistics) are more useful when viewed as a change in trend over a longer time frame and not at over a month to month period.

This helps you get a better understanding of an area’s performance.

Median prices are really best used as an indication of the composition of sales rather than a good indicator of changing property values.

It’s important to look at data such as sales volumes, market depth and investigate ‘like for like’ recent sales evidence to estimate current property values.

Have any questions about the property market? Contact our friendly & knowledgeable Agents

Written by Naked Edge Writers

Median Property Prices - Why You Should Take Them With A Grain Of Salt
Naked Edge Writers

Naked Edge Real Estate Writers collaborating to bring the latest news and trends in real estate for buying, selling and working in the exciting world of real estate.

View all posts by : Naked Edge Writers

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