Four things to know about median prices
Median prices are an often discussed dollar figure that many use to determine growth across markets or to mark down changes. However, it may not be as simple as you think.
If you want to quickly have a look at the median price in an area that interests you, as well as the recent changes in this figure, you can search your suburb here.
Here are four easy things you must know about this number if you're reading about it, or intending to use them as a gauge for market performance.
1) How to determine the number
Firstly, it's worth knowing how median prices are determined in the first place. The Real Estate Institute of Victoria's Enzo Raimondo previously provided us with this quick guide to working the figure out. While, usually, you will rely on a data provider to give you the latest statistics, it's important to understand how they are put together.
"The median value is the middle price in a series of sales, where half of the sales are of lower value and half are of higher value. For example, if 15 sales are recorded in a suburb and arranged in order from lowest to highest value, the eighth sale price is the median price," explains Raimondo.
To get an understanding of how this works, compare it to other measures such as averages and means. The mathematical median is not the same as the average - which is all the prices added up and divided by the total number of sales - nor the mean, which is another word for average. The mode is the number within a set that occurs most often. Median prices in property are based on the homes that have recently transacted, and are most often divided into units and houses.
2) A sudden increase in median is not an increase in capital gains
While median prices are a useful tool for understanding the price changes within a suburb - notably, when growth happens or declines - 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. Consider what would happen to the median price if, for instance, a number of multi-million dollar homes came onto the market at once, a new development was created or if first home buyer activity surged into a suburb.
You will need to look deeper into the sales that did go through to really understand what this activity is - are stale listings being chewed through or are new properties coming online? What is the difference in the data set between the last two months? Having a look at the types of properties that sold the previous month compared to the new record can be very helpful - you might notice that those selling last month were primarily four bedroom brick houses, where now they are two bedroom fibro houses. This may suggest that the downturn in price isn't a sign of your property's value tanking.
Despite it not necessarily being an indication of capital growth, what it can lead you to discover is often far more powerful - significant changes in an area. This could include blocks suddenly subdivided or opened up to different zoning, or new supply coming online.
3) Median prices mean more in some areas than others
Certain areas will see their median price statistics working out to be more useful and meaningful than others in determining growth. For instance, suburbs where the properties are largely homogenous, that is with similar numbers of rooms, layouts and block sizes, are likely to see the median price as more of a reflection of value. And suburbs where many properties transact on a regular basis will also be more statistically reliable than tightly held areas where a home may only sell once every 10 years and each is significantly different from another.
Similarly, some suburbs are far too large for the number to be meaningful - with good and bad sides that don't perform the same. Some investors will rely on median price changes at a state or city level that may not be specific enough for some of the more important applications.
4) The statistics are best looked at over a longer period of time
Lastly, and importantly, median prices are more useful when viewed at over a longer time frame and not at over a month to month period. This helps you to truly get an understanding of growth and the area's performance. Spreading out the data set by time periods can help iron out some of the unusual activity in certain months and quickly point to where the outliers in the data are.
