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- 1. How is the median price calculated?
- 2. A change in the median price does not necessarily mean a change in your property’s value
- 3. Median prices are a more valuable indicator in some areas than others
- 4. Different data providers measure different statistics
- 5. Statistics are more reliable if looked at over the long term
Be careful – observing the change in median property prices may not be as useful as you think.
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 with what’s really happening to house price values.
So here’s 5 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.
Look at it this way…
- 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.
Here’s another way of looking at it…
Let’s assume there were 5 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).
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.
Medians are also misleading when a suburb has two distinct markets. This is common in bayside suburbs where houses near the beach fall in one price range and are very different to house prices further inland.
Median price changes can also be misleading in many of the new outer suburban areas where the type of property sold a number of years ago, vacant land, has now been replaced by new homes.
And of course gentrification with locals renovating their properties can change the nature or quality of the properties and therefore median house prices.
4. Different data providers measure different statistics
Ever wondered why different data providers’ median prices are different?
- The data they collect,
- The time frames they report on – daily, monthly or quarterly
- The accuracy/complexity of the index methodology they rely on.
One way around this shortfall in median property value changes is to use data sets like the Corelogic Hedonic Index which seeks to overcome some of these issues by measuring the attributes of properties that are transacting as part of the analysis.
Understanding factors such as the number of bedrooms and bathrooms, the land area and the geographic context of the property allows for a much more accurate analysis of the true value of movements across specific housing markets.
This method also allows for compositional change in consumer buying patterns when measuring capital gains.
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.
That’s why I also look at data such as sales volumes, market depth and investigate ‘like for like’ recent sales evidence to estimate current property values.
Be careful relying too heavily on the data
You’re probably aware that property investment is part science and part art.
The art component is the market intelligence that comes from decades of experience of buying and investing on the ground.
The statistics alone won’t allow you to differentiate between a good floor plan or a poor layout, a desirable neighbourhood compared to less desirable location with negative stigma or an aspect that receives abundant natural light compared to a poor orientation, etc.
There is no doubt that it’s important to understand the property fundamentals and research property data, and the longer back the data research goes the more accurate the data is likely to be in forecasting future trends.
The problem is data is often wrong or to put it correctly…the way investors interpret data is wrong.
Let’s be frank …you can make it say almost anything you want.
I’ve seen too many property investors find a property that they like, one they become emotionally attached to and then find the data to confirm their decision.
That’s called “confirmation bias” – they’re using data backwards rather than in the right way.
What I’m getting at is that while you need the data in the research phase of your investment journey, to be a successful property investor you need much more – you need on the ground experience and perspective.
Data will only get you part of the way, you must compliment data with local area knowledge and expertise.
That’s why our buyer’s agents at Metropole are ex selling agents who understand the local market drivers.
They understand why one side of the road is more valuable than another or why one part of the suburb is more in demand that another.
This is the type of perspective that money can’t buy.
Property investors who only do their research on the Internet but don’t have the on the ground expertise or context have the “science” part of the investment equation covered, but miss out on the “art” part of investment smarts.
Don’t get me wrong, doing your research is a critical step in getting ready to invest, but it is only one of the many important steps.
There is no substitute for practical, on the ground experience.
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