One factor we look at when researching an area for investment is the median sale price of houses and units. This is the most commonly reported real estate statistic which analysts consider to be reflective of the price that a “typical” property sold for; but don’t be fooled by median prices; the way these are calculated first needs to be understood.

The median is generally reflective of market activity, unlike other averages such as the mean which can be skewed by very high or very low sales. The median price is the middle price of all sales recorded in a particular suburb, postcode, city or state. If there were 101 sales in a particular suburb, in ascending order, the median would be number 50 on the list. Half the sales transacted would be greater and half would be less than the median. For example, if five houses were sold in a locality for $400,000, $405,000, $410,000, $415,000 and $900,000, the mean, or average, would be $506,000 but the median would be $410,000, which would be more reflective of the “typical” house sold.

It is commonly assumed that the median price is the same as the mean (or average) price, but that’s not the case. To calculate the average, you would add up the 100 sales and divide the total by 100 (the number of sales).

Medians are most commonly calculated each quarter (a three month period) and for each year. Percentage changes in median sale price from the previous quarter, the previous year and the previous five year period are also often provided. The Real Estate Institute of Australia and the equivalent state bodies use the quarterly and annual calculations; other analysts compile figures for six monthly timeframes. It is important to take into account the timeframe of the data set, as this can have a significant effect on the figures reported.

Another important factor to consider is that the sample of sales is not too small. The REIQ will only publish medians where a minimum of 10 sales have occurred in a metropolitan locality or a minimum of seven sales in a regional locality. Localities with fewer sales are generally regarded as having a sample size too small to be truly demonstrative.

Quarterly statistics can provide a good indication of recent sales activity and the quality of properties that have sold in a location. However, due to the short reporting timeframes and the subsequent low number of sales, quarterly medians can be volatile and show fluctuations if there is a higher than normal number of very high or very low priced sales.

Fluctuations can occur when a higher than normal number of prestige or renovated homes are sold in a quarter or there are varying numbers of new property sales or higher than normal numbers of properties sold with a prominent attribute such as water frontage or extensive views.

Median sale prices for a 12 month period, on the other hand, are generally not subject to these fluctuations as they are based on a greater number of sales. Annual medians provide a more “trend” view of what has occurred within a location.

The median price is thus reflective of the current or historical ‘market activity’. In volatile economic conditions such as now, most activity is happening in the lower end of the market with the stimulus of the FHBG and the tougher lending environment. At the higher end of the market there is quite a number of ‘distressed’ sales due to uncertainty and ‘restructuring’ in the executive end of town.  One property recently was listed at $14M but went at auction for $9M.  This of course has a visual impact on the median prices although not truly reflective of the midrange property values. In a market where there are few purchasers those who do not need to sell hold their property off the market waiting for better times.  The subsequent “drop” in median prices may be more reflective of which houses are being bought and listed rather than ‘real’ value.

It is in these uncertain, volatile times that the mrd “set ‘n’ forget” strategy stands up. Buying property in the middle price range in areas where people want to live & work, where there is good infrastructure and great livability, should see your investment protected from the extreme “ups and downs” (volatilities) experienced at either end.

It is important to consider all the differing factors involved in gathering and calculating data, so whilst median prices help with knowledge on values in a location they are also indicative of swinging market conditions and need to be viewed in the big picture perspective.

Happy Investing,

Katrina Lockhart
mrd customer care program… because investing is personal

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