In relation to property, the median price is one of the most reported, discussed and analysed pieces of data. On the surface it can give you an indication of the value of houses and units in a particular city or suburb. It can also provide an indication of the trend and the strength of a particular market and be a reflection of the general sentiment and confidence in the market.
The median price is the middle or midway price between the highest and lowest price in a sample of sale prices. For example, if you had a sample size of three property sales, 1,050,000 and 1,100,000 and 1,300,000 then the median would be the price in the middle or 1,100,000. Unlike the average, which is calculated by adding all sold prices together and dividing by the number of sales (in this case would be 1,150,000) the median price is not skewed by outliers - that being prices exceptionally high or exceptionally low. As a result, the median price is a more accurate market overview of price than the average price.
There are a number of different data companies that compile median prices for the Australian markets. A quick Google search reveals significant variations for the Melbourne median house price. There are three different medians for December 2017: Real Estate Institute of Victoria (REIV) has $821,000, Core Logic has $832,448 and Domain has $903,859.
There are a couple of variables which can cause these differences, as each data company has their own methodology and differing methodology will result in differing results.
- The size of the sample area. If the parameters of the sample area are different, a different number of sales being will be used in the calculation. Is it the City of Melbourne Local Government Area (LGA), Greater Melbourne, Metropolitan Melbourne or the Significant Urban Area (SUA)?
- The timeframe of the sample. Sales from the last month, quarter, or year of sales could be used in the calculation. Different timeframes will affect the ultimate outcome.
- The relative market activity. In a small suburb or regional town there may not be enough sales to allow the median to be a true representation of the market. The more sales in the sample size the better as a small number of sales will skew the result.
With such variations in the median being reported, the underlying trend needs to be considered and may well be the best indicator. Despite the variations in the annual growth rates for Melbourne that have been reported (REIV = 13.2%, Domain = 11.3% and Core Logic = 10.1%), they are all reporting an upward trend for the 12 months to December 2017. This however must not be looked at in isolation as obviously past performance is not an indicator of future performance.
Even with conflicting median prices reported, the median price is still considered an important indicator. When looking to invest in a particular region or suburb, it is crucial to consider liquidity and an exit strategy at the time of purchase. Since the median is an indicator of the price point where the majority of properties are transacting, purchasing an asset at or below the median price will ensure depth of market for buyers when you eventually sell and provide a greater pool of renters, helping with cashflow in the interim.
So, if there’s one takeaway from this, when doing the research for your next investment property and looking at median prices, be sure to use a consistent data source and look at the short and long term median growth trends.