What is Median House Price? – Why you should not rely on it in isolation

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Median House Price

The Median House Price is the price of the property at the exact middle in a listing arranged in order from lowest to highest price. It should not be confused with the average house price which is the total value of all the properties sold divided by the number of houses sold.

The median house price is considered to be more accurate than the average price because it is less affected by unusually high or low sale prices. Median prices are usually based on recent home transactions and can show trends in the market.

If median house prices are trending down, it means that property prices are going down in general in that suburb. If they are trending up, it is a sure sign that the market may be getting hotter and homes tend to sell faster.

Median house prices are a direct reflection of activity in the market and are most often divided into units and houses. This is an important real estate data when deciding on a property investment.

How is the Median Price calculated

In an investment property sales list with 15 homes, our median price will be house number 8, which has an equal number of entries before and after it. In simpler terms, if seven houses are sold in the same suburb over a month with the following sales prices:

$778,000, $630,000, $985,000, $883,000, $719,000, $691,000, and $599,000.

Begin by arranging the figures from lowest to highest:

$599,000, $630,000, $691,000, $719,000, $778,000, $883,000, and $985,000.

The median sale price would be the middle figure which is $719,000.

Why would the Median Price be used instead of the average house price?

Although the median and average house prices can be similar if the sale prices are relatively evenly spaced, median values are considered to be better analytical data. The median value represents the middle area where most of the sales congregate around.

Hence, it is important and popular in the residential property market where hundreds or even thousands of properties are sold in a year. With so many figures to consider, the median price can be used as a yardstick value for the area to gauge its performance over time.

Unlike average values that can be skewed by abnormally high or very low sales, the median house prices are less likely to be affected. For example, we have established that the median value of our seven properties above is $719,000. We calculate the average price as $755,000 which is slightly higher than the median value as the prices are closely spaced.

If we were to record an abnormally high price, say $1,230,000 and $1,570,000 in place of the last two figures, $883,000 and $985,000, our median price will remain $719,000. However, the average price will rise to $888,000, some $169,000 or 23.5% higher than the median value.

What Variables are Used to Determine Median Price?

There are no standard rules regarding what variables should be used to determine median house prices. However, the most common variables used in real estate are the suburb, the time frame, and the property prices. When comparing median house prices of investment properties, it is essential to ensure that you use the same variables every time for consistent results.

Why Changes in the Median Price Does Not Necessarily Mean a Change in your Property’s Value

Median house prices are used to track trends in the property market. If the median prices increase, it tells us that many more highly-priced properties are being sold, indicating a general rise in property prices in an area. However, this doesn’t translate to a relative increase in the value of your property. In fact, it doesn’t tell us anything about the value of your property. What it does indicate, however, is the price changes of properties that have transacted indicating the level of activity in the market.

Therefore, a rising median price in a suburb could just be as a result of an increasing number of sales occurring at the expensive end of the market than at the cheaper end.

Using the same example above, if seven properties were sold for $599,000, $630,000, $691,000, $719,000, $778,000, $883,000, and $985,000, resulting median price is $719,000. A few years later, if 3 of these same properties go back into the market and were resold for exactly the same price: $630,000, $778,000, and $985,000, resulting median price is $778,000.

In this instance for these 3 sales, trend is showing a $59,000 increase from the previous median price even though the value of the properties did not really change. What this means is that for a more accurate analysis, you’ll need to consider other real estate data points during the same period to make better property investment decisions.

Why Median House Property Prices are Different Everywhere you Look

Median house prices usually differ from suburb to suburb and can be more useful in determining property price trends in some areas than others.

For example, the median price will present a more accurate picture of property value changes in suburbs where the properties are largely identical and of similar pricing than in areas where house prices are significantly different from another.

Similarly, areas where many properties are being closed on a regular basis will usually have more accurate median prices than areas where homes are sold infrequently. Median house prices are less accurate in suburbs with a large real estate market which may have several different performing locations.

The median prices can also be misleading when analysing a suburb with two distinct property markets. Their market prices may not perform similarly but may end up being lumped together to produce an inaccurate value.

Why Different Data Providers Report Different Median House Prices

While carrying out research, you may come across different data providers reporting different median house prices. That’s because they are calculating the median prices using different data points, time frames (daily, monthly, or quarterly), and index methodology.

You can avoid such discrepancies when comparing median house value changes by using standardized data sets or real estate data sources which consider the attributes of properties being transacted on as part of the analysis to overcome some of these issues.

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Median House Price Should be Reviewed Long Term, Not Just on Recent Activity

When viewed long term, median house statistics show trends and changes in market prices. This provides investors with a better understanding of an investment property’s potential performance over an extended time frame rather than from month to month.

Median house prices tell us more about the composition of sales, the volume of high-priced homes versus low-priced homes sold, rather than changes in property prices. This makes the median statistic a better expression of long term changes and trends than recent activity in the market.

Why you Should Not Rely on Median House Price Data in Isolation

The median house price is one important real estate data that can be interpreted in almost any way you want. However, it only paints one part of the picture which may not always be accurate or interpreted correctly.

Since it shows historical trends, the longer back the median prices data go, the more accurate it will most likely be in forecasting future trends. It is important to understand the right fundamentals to apply and combine your analysis with other real estate data for better insights.

Using median house prices alone won’t provide you with the perspective to understand why the trends occur in the first place. Neither does it provide a strong framework to predict how your specific investment property will perform over time. By combining the historical insight of median house prices with other real estate data points, you can have a more holistic picture of the investment potential of a suburb.

For example, knowing the median prices of a suburb doesn’t tell you the rental yield or volume of search interest for properties in that area. Other important real estate data points to consider when searching for the best areas to buy investment properties include:

  • Days on Market
  • Vacancy Rate
  • Capital Growth
  • Household Income
  • Rental Listings (Rental Stock)
  • Sale Listings (Stock on Market)
  • Online Search Interest/Demand
  • Percentage of Owner and Renter

Combining Different Real Estate Data will Provide the Best Insights for Data Driven Investment Property Decisions.

When combined with these real estate data points, we can use median house prices to see the trend of demand for properties in a suburb. If the median prices are rising along with decreasing vacancy rates, days on market, and sale listings, it indicates an increasing demand and the resultant rise in house prices.

Combining median prices with household income will tell you the economic growth of residents in the area over a period. For example, rising median prices could mean the that house prices are increasing in general, however, we can be more certain if we combine this with a similar rising trend in household income.

An increase in Local Government Building Approvals equals a relative rise in available properties in an area. Significant regulations like these can affect median prices as a larger influx of houses into the market will affect property prices changing the trend over time.

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