When reading articles or listening to experts talk about residential property, you will come across terms likes “average” or “median” prices.
These may seem like interchangeable terms, but they are in fact quite different and it’s important to understand this difference.
So, what is the difference?
The best way to explain the difference between average price and median price it is to look at the example below.
The table list 11 property sales, ranked in order from smallest to largest.
Average Sale Price
The average (or mean) price is calculated by adding up all of the sales and dividing them by the number of sales.
In this case, the total of all sales is $6,151,000, which, when divided by 11 sales, results in an average figure of $559,182.
Median Sales Price
On the other hand, the median price is the sales price where half the sales are above and half the sales are below it.
Basically, it’s the middle number. So in this case, the median value is property 6 – or $450,000 – because 5 sales are above it and 5 sales are below it.
Why the Median is a Better Yardstick
Median values tend to be a better statistical measure because they represent the figure other numbers congregate around, or in the case of our example, where most of the sales sit.
This is why it is predominantly used in the residential property market where a suburb might have hundreds of sales in a year, or even thousands of properties used to calculate a yardstick value for the area.
Importantly, median values are less likely to be skewed by very high or very low sales.
For instance, in our example, properties 10 and 11 are very high values in comparison with the other 9 properties – in fact, they are between 2 and 3 times more expensive.
Notably, the impact of these two properties was to raise the average to over $559,000, some $109,000 or 24% higher than the median value.
Interestingly, if we took properties 10 and 11 out of the equation, we would end up with an alignment between a median value of $455,000 (now being property 5) and $439,000 being the adjusted average ($3,951,000 divided by 9). This is a good example of how averages can be skewed by unusually high (or low) numbers.
Benefits of using Median Values
The big benefit of using median values is that they help give you a better sense of whether a suburb is likely to be affordable and alerts you to potential opportunities or warning signs.
For instance, if a property is priced below the median value for the area, it could mean it’s under-priced or there’s an opportunity to add value.
If it’s well above the median, it could mean that the asking price is too high or there is something special about the property (like its size) that justifies the price.
In our example, there would have to be something unique or different about property 10 and 11 to explain the materially higher sales prices.
In any event, where a property’s sales price is markedly different to the median value (up or down) it’s a signal that you should question and investigate further the reasons for the difference, which will help you assess whether they are reasonable or not.
Some Words of Caution
As a final thought, there are two key things to watch out for when using median sales values.
- They can be affected by an unusually high number of expensive or cheaper properties sold during the period under review. For this reason, it’s a good idea to measure median prices over a period of time (like 3, 6 or 12 months) to get a better sense of trends and direction.
- When using median sales values, make sure you compare apples with apples. Remember, a street or suburb can be made up of different property types like houses, units, flats and apartments. You should therefore ensure you assess median values on the basis of the specific property type you’re interested in and not on a combined or overall basis.