Beware The Median Price

Discussion in 'The Buying/Selling Process' started by Garry Mac, 18th Sep, 2010.

  1. Garry Mac

    Garry Mac Member

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    Hi folks

    One of the most common statistical measures pertaining to property investment is the good ol’ median price. Median price reflects the ‘middle’ price in a sequence of prices. It is important to understand that it is not the average price – which is calculated by adding all prices together and dividing by the number of prices involved.

    The median price is supposed to provide a more accurate reflection (than average prices) of property values in a particular location. However, based on 20 years ‘real world’ experience, I offer a word of warning. While the median price does provide a better indication of property price movements (compared to the average price), it is only an indicative measure. In fact median prices really tell us more about the type of property being sold rather than value of property in a particular location.

    There are a number of potential problems with median prices including the various ways they can be calculated, not to mention the fact that prices below and above the middle price are virtually ignored – which can be very misleading!

    One of the most commonly asked questions is… why do different organisations report median values that are quite different? The answer to that question lies in the methodology used to calculate medians.

    If we consider three well known research-based organisations – the Australian Bureau of Statistics, Australian Property Monitors and Residex – each one uses a very different approach in their calculations which provides different results.

    So which one is most accurate? It’s a matter of personal choice – personally I’ve been using Residex for many years and while I find them to be quite reliable, ‘real life’ is the only accurate measure. In other words, the value of a specific property gets down to what someone is prepared to pay for it – the market determines the price.

    The moral is (as with any form of investment), 'the money is in the research!'

    Cheers
    Garry
     
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  2. csc2

    csc2 Banned

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    this is old hat stuff.......anyone worth their salt who invests in real estate will ignore median house prices spruked daily by agents and others.........you only have to search on s/s...its been covered a thousand times previously.

    the heads up by you is welcome but i dont think you will be converting many on here...most already would be aware.
     
  3. Andrew_A

    Andrew_A Buyers Agent

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    Individual resales is a reasonably robust measure to use, also some of the house index data is getting more sophisticated.

    The only attention I pay to relatively stable median figures (not ones skewed by small sample sizes or composition issues such as new house and land builds) is in terms of where you are buying on the spectrum, are you targeting properties above, below or at the median etc.
     
  4. Garry Mac

    Garry Mac Member

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    Might be 'old hat' BUT it is still a significant issue! The number of folks relying almost totally on medians is significant! In our business we see it every day.
     
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  5. willair

    willair xx

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    Not always the money is sometimes 1-5-10 years down the investment road after the property or other investments are purchased,and most statistics are 12 weeks out of date by the time they come too the surface the accurate info i find out is from word of mouth from people who always seem to be one step ahead of the rest..willair..
     
  6. chilliblue

    chilliblue Member

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    Medians are great for those areas that are more popular dense and closer in area such as the inner city suburbs. The information in these areas tend to better represent the area as whole.

    However, go out to the regionals and it can be another ball game.

    These regions are are extremely diverse and can be hundereds of kilometres in area with varied property in between.

    An example is my last purchase in Orange. There are houses from $69K all the way up to $800-900K and everything in between.

    Depending on how far you are from the centre and which side of the highway/railway tracks will vary the price by $100's.

    It is up to us investors to sort out the sales and to see if the median figures are correct.
     
  7. Garry Mac

    Garry Mac Member

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    I would still argue that your results (5-10 years down the track) are significantly impacted by your initial buying decision AND remember...research should involve a lot more than just looking at stat's!
     
  8. Aaron Sice

    Aaron Sice Seldom Seen Kid

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    i think it's a nice timely reminder, personally.

    medians are awful. strip away the upper 10% and lower 10%, then re-do your figures and see how dramatically the figures change.

    if medians were so great, it should only make 3/5 of fug-all difference.

    it's like using GDP to gauge the economy.
     
  9. meconium

    meconium Banned

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    The OP, Gary Mac (picture and all), is a buyers agent. He is not motivated by altruism, he is shamelessly selling something to those who wish to buy his services.

    The median is one of few imperfect tools buyers have when assessing how much to pay for a property. The OP seeks to take that away. Presumably he wishes that buyers trust his judgement and to hell with the numbers.....

    Salesmen coming to these forums with an agenda, as the OP does, should be banned. Thankfully, most of us don't need the advice of buyers agents to tell us what is good value.

    Shame on you OP. I've done very well these past few years by buying houses using lower-quartile median figures. Don't need your help or advice. Have you considered paying for advertisements rather than chasing a free ride here?
     
  10. Garry Mac

    Garry Mac Member

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    I have never hidden the fact I'm a Buyers Agent. My purpose is to share experiences which might just be valuable - obviously not for you BUT maybe for others! In fact, there are many business folk participating on this forum and I find them a wonderful source of knowledge!
     
  11. Gools

    Gools Member

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    It's certainly an interesting topic. I found this quote a bit interesting about inner city property sales in Adelaide. It reads like a mansion selling for millions has the ability to change a median figures more than any sale that is anywhere in the range higher than the current median (which it obviously can't). It would be much different if he was talking about average price though.....

     
  12. meconium

    meconium Banned

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    It's free advertising for you and it's clearly in your interest to flaunt your wares, so to speak. One would have to take whatever you say with a pinch of salt given that you have an agenda of your own.

    It's no wonder you don't like clients looking at lower and upper quartile medians - with this information they may not need your services. I've done well using medians to give me guidance that helped me on my way. If people used upper and lower quartile medians when investing in the larger suburbs, they will never end up paying too much.
     
  13. BayView

    BayView Member

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    Thanks for the heads up Garry.

    No doubt many newbies here will learn a lot from that post.

    Nice self promo by the way! ;)

    I've been bangin' on for ages about the same thing actually. When the word median is used, most people conjure up this figure of the average house and what most of the houses are worth in an area.

    I see it here in Dromana where I live all the time.

    The majority of houses actually bought and sold here are yer houses to be used as elcheapo holiday homes - cause that's what most folks who want one can afford. A good number in recent years are for families moving in, but these are still in the lower end of the price range mostly, because most families around here are trying to simply make ends meet each week. So, the median stays low.

    But, there are loads of very nice homes - and plenty in the upper end market of price, which have gone up in value a good deal. But of course; there are a lot less folk around who can afford to buy a you-beaut holiday home, and those who buy them usually hold onto them for a long period. There are way less sales at the top end of price range in our area - less folk around with loads of coin.

    So, we end up with a median which tells everyone that the houses are worth X - a fair bit lower than what yer average house is actually worth down here. This will happen in every suburb of course.

    All it takes is for a glut of sales to occur in a particular price range in a small period of time, and the median changes to suit that. The media pounce on this as an indicator of market movement, but it is at best; a myopic view. The prices of the other houses haven't really moved either way.

    So, this is merely the perception, which people will listen to who hear these reports on the news/media, while the reality is something different.
     
  14. Piston Broke

    Piston Broke Banned

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    And I like to make it loud & clear:

    Median prices are a load of BS.
    If you don't know the area well they are misleading and deceptive tools for people with flash offices to sell reports, magazines, seminars and real estate.
    Unless you know your ****, you should never use median prices to make your buying decision.

    Not it aint, they are both WRONG.
    And if you use them, so are you.
    Unless you use them to sell your RE to people who believe them of course.
     
  15. JamesGG

    JamesGG Member

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    It's funny how this forum works.

    If someone joins the forum and does nothing but advertise, they're shot down for spamming and criticised for not contributing to the collective knowledge here.

    And yet, if someone joins up and does contribute something of their expertise... they are still shot down for spamming. An inconsistent message?

    Forgive me, meconium;

    I don't understand the difference between Garry Mac posting his thoughts here, compared to say, Prop or Jacque or Andrew, who are generally allowed to post and contribute as they please? Many mortgage brokers do this as well in the finance threads. I'd imagine that all of these people would have considerable expertise to offer, given their day-to-day dealings in the market, and I think that the forum is enriched by their presence.

    Garry's signature does make a fairly bold claim, for which I am sure he would have his justifications. He is not alone there either, though. His thoughts on median pricing are probably fairly well-known amongst the veteran forumites and investors, but I do think that it is important to remember that not everyone has already achieved the same level of knowledge and / or success. And sometimes, I think, many of us can do with a reminder of the little things that make this property game so interesting, anyway.

    I guess what I'm trying to understand, is why you took exception to Garry, in particular. Or, is your suggestion that anyone who might be involved with a business that could benefit from posting about real estate, should be banned...?
     
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  16. Aaron Sice

    Aaron Sice Seldom Seen Kid

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    i provide a service, too. providing a little tidbit of information does not amount to advertising anymore than introducing yourself with your business card does.

    i look forward to Sim banning me as well.
     
  17. Perth Investor

    Perth Investor Member

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  18. willair

    willair xx

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    Gary you can argue all you want,means nothing to me after 29 years investing in property through all the ups and downs 18%interest zero CG for many years at at time and Tenants problems I still think you make your money a few years down the track,look at it like this if someone had bought property in 1990-1992 and i'm only talking inner Brisbane from Rocklea back into West End during that period and held for several years then after zero CG for several years sold for less then they paided that what happened to several investors that i know..willair..
     
  19. Gools

    Gools Member

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    Correct PI, Aaron got it wrong. The average price is affected by these extreme high and low sales but the median figure is not. If there aer very few sales in the period then the median can swing greatly but with a decent sample the median figure can be pretty reliable.

    Horses for courses though, nothing beats decent comparable sales to work out value.

    Gools
     
  20. Aaron Sice

    Aaron Sice Seldom Seen Kid

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    yes you would be correct with the numbers of house.

    i was speaking about values - sorry i didn't mention that thanks to a brain fart.