Beware The Median Price

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.  As a licensed Buyers Agent, we never rely on median prices...they provide a starting point only. 

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, 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.   

To clarify how the median (or middle) price is calculated, let’s consider an example -

During the month of August, five houses sold in the suburb of Blacktown in Sydney:

House #1:      $300,000

House #2:      $350,000

House #3:      $375,000

House #4:      $450,000

House #5:      $550,000

 

To establish the median price, you need to identify the price that sits in the middle of the sequence of numbers.  In this case the median price is $375,000 (House #3).  

To calculate the average (or mean) price, add the 5 house prices together and divide by 5 (ie the number of houses in the sequence).  This results in an average value of  $405,000 which is substantially different to the median price.

 

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. 

There are two reasons I choose to rely on Residex more so than other organisations:

1. Through experience I’ve found them to come close to reality
2. I like the methodology they use – based on same property sales

 

The moral to the story is to consider median values as a starting point to your property price research, however just like all your due-diligence, you need to look further to uncover the most up-to-date and accurate pricing information.  The only way to do that is to do what we do as Buyers Agents – get out amongst it, drive the streets, ask questions and uncover the very latest (not yet reported) sales figures for comparable properties.

Housing Shortage? Smart Real Estate Investors Can Profit AND A Professional Buyers Agent Can Help!

While lenders contribute to housing undersupply, smart property investors have an opportunity to profit AND a Buyers Agent can help!

According to the Housing Industry Association (HIA), the demand for Australian housing exceeds supply by approximately 40,000 each year. For those of us who have studied basic economics, when demand exceeds supply, prices increase. This adds further pressure for house prices to increase which in turn raises the level of unaffordability.

Property industry professionals understand and accept that lenders are now under more scrutiny than ever before – with new lending legislation (Credit Code) introduced recently, not to mention the Global Financial Crisis (GFT).

However there is an irony here – especially when you consider this country’s desperate need for housing.  On the one hand it is absolutely essential that Australia continues to regulate its finance industry to ensure we never end up in a situation similar to America. On the other hand, the tighter the lending market becomes, the more desperate our housing shortage becomes.

By way of example, according to a recent survey by the Master Builders Association of Victoria, there is an undersupply of 29,000 homes in Victoria with 5,000 too few homes being built each year. If you are interested in where Victoria will be in 10 years (the average time it takes for property to double in value), it’s a pretty simple equation: 29,000 + (5,000 x 10 years) = 79,000…that’s a 79,000 housing shortage in Victoria alone.

According to Executive Director of the MBA Victoria Brian Welch, the MBA survey clearly showed the impact of tighter lending practices.*

An opportunity to profit

So the question is…how can property investors profit from the housing undersupply?  The answer to this question gets back to basic economics – when demand exceeds supply, prices increase.

The world’s greatest investor Warren Buffet advocates not following the crowd, ie doing the opposite to the majority. In terms of the property market, right now is a buyers market and smart investors are getting into the market, while not so smart investors (the majority) are sitting on their hands.

 

So cutting to the chase, now is the time to be buying property in Australia BUT with one very big caveat…do your research AND if you’re unsure as to what you’re doing, hire professionals to help.

 

Even those of us who do this for a living (as professional buyers agents) surround ourselves with a team of professionals including lawyers, accountants, building/pest inspectors, mortgage brokers, quantity surveyors, etc.

 

Let’s face it, buying real estate is the most significant purchase most Australians will ever make. If you make a mistake, the penalty is both very costly and long-term. So it pays to get it right AND a professional real estate Buyers Agent can certainly help!