If you have been relying on median property prices to help you make decisions regarding your real estate options, you may need to take a minute to think things through.
Referencing median property prices alone is not as useful as one would think nowadays, due to several reasons one of which is the changing market behaviour that could send you off on the wrong foot.
To avoid making a mistake in your next real estate property or investment decisions, here are some helpful and practical tips to consider;
Median price calculations
How are median prices calculated? The median property price is the middle property in a list of properties sales when arranged from the lowest to the highest-priced. Simply put, it is the middle property on that list.
It should not be confused with the average price of the group, which is calculated as the total value of all the property sales divided by the number of properties sold.
In a technical sense, the median price calculation is more accurate than the average since it is less affected by a few unique lows or high sale prices.
A median price change may not result in a change in property value
While a median price can be a good tool to comprehend price changes of properties in a transacted market, an incremental increase of 10% is not indicative of an increase of 10% in the property’s value.
It may even cause your property value to drop.
For instance, if there are several multi-million dollar homes are listed and sold in the market during the previous month, median prices are affected but the value of a more moderately priced property may not have moved at all.
This is in the same way with falling median prices in an area could be indicative that there were merely more sales that occurred at the lower-priced segment than there were in the high-priced units.
With this in mind, it is important to understand movements in the market and have to look deeper into actual sales figures that occurred in a given period.
When scrutinising the different property types sold during the previous month versus the new data can prove useful. You may discover that an increase in median prices does not mean an increase in your property’s value.
Median prices may only be valuable in some areas
Median price change statistics can be applied in determining property price growth only in some areas, not all.
For example, properties in suburbs are generally considered largely homogenous thus have similar prices which are likely to find the median price to be an accurate indicator of true value movements.
Additionally, suburbs, where many properties transact regularly, can also be more statistically useful compared to areas where properties rarely get sold, held tightly, and are significantly different than others.
Also, some suburbs are too diverse for the numbers to be consistent and meaningful, aside from good and bad locations on opposing sides of main road arteries and do not perform sustainably especially those that are diversely grouped.
This is why relying mainly on median price changes in the level of capital cities can be too inconsistent and prove misleading.
Different data providers can measure varied statistics
There are several key factors why median prices may vary from different data providers.
The data collection process and the data collected, timeframes, and the index methodology used.
Looking at these factors alone could give you an idea of how it could cause variations in data interpretation.
Long-term data and statistics tend to be more reliable
Serious investors pay attention to long-term data and statistics when they need to understand market dynamics, instead of short-term median prices and trends, which helps provide a more comprehensive understanding of an area’s performance.
Simply put, median prices are effective as an indicator of the composition of property sales, instead of a strong and reliable indicator of changing property values.
Rather than putting your cards on median prices, it would be wise to delve into quantifiable and reliable data such as sales volume, market depth, and look into like-for-like sales figures to estimate current property values.