The median sale price is one of the most common methods used by investors to track property values and assess their changes over time.
But today I’d like to explain why it can often be a misleading measure.
According to data providers Australian Property Monitors, one of the best performing suburbs in Australia during 2015 was Peregian Springs on Queensland’s Sunshine Coast where units experienced a massive lift in median sale price of 136% to $375,000.
At the other end of the scale, last year’s worst performer was Bilinga on Queensland’s Gold Coast where the median sale price for houses fell by a huge 49% to $539,000.
Before we rush for our cheque book (or a gun) we need to understand that these huge variations in just twelve months were due not so much to high buyer demand pushing prices up or oversupplies of stock causing price falls, but to changes in the type of properties that were sold in these suburbs from one year compared to the next.
Properties don’t sell very often, which means that the properties sold in one year are very likely to be different to the ones that sold the previous year.
This in turn gives data providers a headache, because how can they measure the changes in price that have occurred in a suburb if they have to rely on different property sales to do this?
The statistician’s toolkit comes to the rescue by offering them the use of means, modes, medians, stratified ranges, hedonics and repeat sales each of which has benefits and drawbacks and each of which gives them a different answer.
This is why the most common measure used in the property market is the median sale price; it offers the most advantages and the least issues.
The median is the middle point of all sale prices that occur in a city, region or suburb over a given period of time so it gives us a good indication of general price movements.
But the median can also mislead us if the types of properties sold change.
For example, if more properties are sold at the low price end of the market, they will pull the median price down with them and if more sales take place at the high end they will take the median along for the ride.
Changes in published median prices often do not mean that prices are actually rising or falling – only that more sales of lower priced or higher priced properties have occurred.
Let’s look for example, at one of best performers in 2015, Peregian Springs units. During 2015 a number of high quality new villas were sold for over $400,000 each generating a massive lift in the median sale price, because sales the year before had been mainly of single bedroom units for under $200,000.
From this you can see that the rise in the median unit sale price of 136% was not due to passive growth but to a change in the type and price of units that were sold.
Much the same story, although with a completely different result took place in the worst performing suburb during 2015 which was Bilinga, a southern Gold Coast suburb sandwiched between Coolangatta Airport and the Pacific Ocean.
The suburb only has around 750 houses with roughly 20 sales each year, but the type of homes varies widely from prestige beachside mansions to old fibro holiday cottages.
Whenever sales of million-dollar waterfront properties outnumber sales of townhouses and old holiday homes (which are around a quarter or less or that price), Bilinga’s median house price soars upwards, but if the sales of cheapies outnumber those of the high quality beach front houses, the median sale prices crashes.
This is what created the fall in median price of nearly 50% during 2015 and it had nothing to do with market movements.
It was merely a reflection of the types of homes being sold.
The lesson is simple, don’t rely solely on the median sale price or the way it changes over time as your guide to passive price variations, but also use a major on-line listing site to view the types of properties that were sold over the last year.
Then you can compare them to the types of properties that are currently on the market to see if the types of properties have changed.
If they have, this could be responsible for differences in the median sale price.
Conducting your own research in this way will give you an instant insight into the real causes of price changes that have taken place in any suburb and help you to decide whether you can use the median sale price as a valid measure of market movement or not