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Understanding the Median House Price. Its Significance and Limitations

Updated: Jun 4

Are Median Price a good indicator of market performance?

If you are in the market for a new home or investment property, one of the market pricing indicator you might have have noticed, is the Median Price of a suburb, city or state. Before you start assuming a drop or rise in median price in an indicator of market strength and market direction, you need to understand what a median price of a suburb means, how the median price is derived and what its significance is. Does it really indicate the strength of the market, and the direction of the market movement? IE, is the prices of house in the area really rising or falling? Or is the mass media using the "median price" as catchy titles?

Let's start with the basics.

When discussing the housing market, one term that frequently comes up is the "median house price." This statistic is often used to gauge the state of the real estate market, with many assuming that a higher median price indicates a stronger market. However, while the median house price is an important figure, it is not always the best indicator of market strength. In this article, we'll explain what the median house price represents, its significance, and why it usually does not fully capture the health of the housing market.

What is the Median House Price?

The median house price is the midpoint of home prices sold in a specific area, in a given period of time. The median price is where half of the homes are priced above this point and half are priced below. Unlike the average house price, which can be skewed by extremely high or low values, the median price offers a more balanced view of the typical home value within a market.

Let us now look at this simple example. The sales data of this particular Melbourne suburb. In 1 particular period, 5 houses were sold with prices: $400,000, $500,000, $600,000, $1,000,000, $1,500,000. In this set of sold prices, the median house price is $600,000, as the price is the middle of the set of sold house prices. This is easy to understand.

However, just like any piece of statistical data, it CANNOT be interpreted in isolation.

The Significance of the Median House Price

  1. Market Trends: The median house price helps identify trends over time. An increase in the median price over several months or years can indicate rising home values, suggesting a potentially growing demand and limited supply.

  2. Affordability: For potential buyers, the median house price provides a quick snapshot of the market's affordability. This figure can help buyers determine if a particular market is within their budget.

  3. Policy Making: Governments and policymakers often use the median house price to make informed decisions about housing policies, subsidies, and regulations aimed at improving housing affordability and availability.

Limitations of the Median House Price as a Market Indicator

While the median house price offers valuable insights into a typical price of properties in the area, it has several major limitations that can lead to misunderstandings about the market's true condition.

  1. Does Not Reflect All Market Segments: The median house price can be influenced by the mix of homes sold. For instance, if a larger number of high-end homes are sold in a particular period, the median price might rise, even if the prices of mid-range or low-end homes remain stagnant or decline. Conversely, a surge in the sale of lower-priced homes can drag the median price down, masking strength in the higher-end market. Thus, the median price can be reliable only when similar number of each segments is sold.

  2. Ignores Supply and Demand Dynamics: The median house price does not account for the underlying supply and demand dynamics of the market. A rising median price might be interpreted as a sign of a strong market, but if it is driven by a significant supply shortage, it might also indicate affordability issues and market imbalances.

  3. Regional Variations: Housing markets are highly localized. National or even city-wide median prices can obscure significant regional variations. For example, the median price in a city center might be vastly different from that in the suburbs. As a result, the median price might not accurately reflect conditions in specific neighborhoods.

  4. Housing Market Health: The median house price does not provide insights into other crucial factors, such as the number of days homes stay on the market, the inventory of unsold homes, or the number of foreclosures. These factors are essential for a comprehensive understanding of market health.

Here is why Median Price Is Not A Reliable Indicator of Market Strength

Let's go through some examples of why median price is not a reliable indicator of market strength.

1. High-End Sales Skewing the Median:

Imagine a scenario where a high-end luxury condominium development is released in an affluent Melbourne suburb like Toorak or a scenic bayside area. The project's success results in a high volume of sales to wealthy buyers and investors.

Now, consider the following property sales: $400,000, $500,000, $600,000, $1,000,000, $1,500,000, $3,000,000, and $3,000,000. With these sales, the median price shifts to $1,000,000.

These two high-end sales have significantly pushed the median price up, resulting in a 67% increase from $600,000 to $1,000,000.

It's important to note that this rise in the median price does not indicate a broader market trend. The prices of mid-range and affordable properties remain unchanged or may even decrease. There has been no change to the five other properties. The $600,000 property is still worth $600,000, and no one is paying $1,000,000 for it.

Buyers who focus solely on the median price might incorrectly assume that all market segments are experiencing growth. Real estate agents and project marketers may use this statistic to convince buyers that apartments are good investment properties, claiming that "data do not lie." However, the narrative can be misleading.

Understanding the nuances of the market and looking beyond median prices is essential for making informed real estate decisions.

2. Surge in Lower-Priced Home Sales:

Let's consider the scenario where a developer launches a new affordable housing project in a Melbourne suburb, resulting in a significant number of sales of lower-priced homes. How will this influx of affordable housing affect the median property price?

Assume the following property sales: $400,000, $400,000, $400,000, $500,000, $600,000, $1,000,000, and $1,500,000. With these sales, the median price shifts to $500,000.

Sales of these two affordable houses have pulled the median price down, resulting in a 17% drop from $600,000 to $500,000.

It's crucial to understand that this decline in the median price does not indicate a broader market trend. The prices of mid-range and high-end properties remain unchanged. There has been no change to the five other properties.

However, potential sellers might panic, misinterpreting the drop as a sign of a weakening market, even though the demand for mid-range and high-end homes remains robust. Similarly, budget-conscious buyers might mistakenly believe that prices in the area have fallen by 17% and expect similar discounts on all properties.

In reality, the $600,000 property is still worth $600,000. Educated buyers will recognize this and offer the appropriate value, while lower offers, based on the misperception of a price drop, will be rejected.

3. Regional Disparities:

A recent report from a major property website shows a 1.5% price decline in Q1 2024. This makes for compelling mass media headlines and clickbait, as it caters to what readers want to see.

Without understanding how these numbers are derived or examining the specific sales data, buyers and investors might be misled into thinking that property prices in Melbourne are universally falling.

However, a closer examination reveals a different story. Prices in inner-city and popular suburbs such as Mentone and Bonbeach have actually skyrocketed by up to 1.8%. In contrast, outer blue-collar suburbs like Somers, Carlton, and Ballarat have experienced declines of between 1.3% and 1.8% due to oversupply and reduced demand.

Relying solely on the city-wide median price masks these regional disparities, potentially misleading both buyers and sellers. It's essential to consider the nuances and specific regional trends within the broader market to make informed real estate decisions.

4. Changing Market Dynamics:

Now, during volatility periods, such as during a market downturn, high-end homes are the last to sell, while more affordable homes continue to move. This situation lowers the median price, but does not accurately depict the lack of activity at the high end of the market, which could indicate deeper economic issues.

Alternative Indicators of Market Strength

To get a fuller picture of the housing market's health, our buyers advocates tend to look at other indicators such as:

  1. Inventory Levels: The number of homes available for sale can indicate whether the market favors buyers or sellers. A low inventory often leads to higher prices and bidding wars, while high inventory can signal a buyer's market.

  2. Sales Volume: The number of homes sold over a specific period provides insight into market activity. A high sales volume usually indicates a healthy, active market.

  3. Days on Market (DOM): This metric shows how long homes typically stay on the market before being sold. A declining DOM indicates that homes are selling quickly, suggesting strong demand.

  4. Price per Square Foot: This figure can provide a more granular view of home values, helping to compare different properties more accurately.

  5. Affordability Index: This index measures whether a typical family earns enough income to qualify for a mortgage on a median-priced home. It helps gauge how accessible homeownership is in a given market.

What's next?

With this understanding of house prices and median prices, and its irrelevance in helping you determine what you should pay for your house, it is time you stop making yourself look silly by walking into a real estate agency and demanding a 2% discount in house prices simply because the media says the median house prices in Melbourne have fallen 2%. You might save yourself some time and embarrassment to do a bit more research and arm yourself with more relevant information before you get sorely disappointed.

Why is the Median Price Used, Despite It's Limitations?

The median price is frequently used in real estate reporting because it is easy to understand and interpret. Mass media focuses on readership and clicks, aiming to generate as much advertisement revenue as possible. Presenting complex data sets and explaining the correlations and underlying stories can be confusing for readers. Therefore, it is simpler and more effective to present a single, easily digestible number.

While the median price offers a quick snapshot of the market, it can be often misleading. It does not account for regional disparities or the variety of factors influencing different market segments. This simplification can result in misunderstandings among buyers and sellers, who might not see the full picture.

Despite its limitations, the median price remains a popular metric due to its accessibility and the media's preference for straightforward, attention-grabbing figures.


While the median house price is a useful tool for getting a quick snapshot of the housing market, it should not be relied upon exclusively to gauge market strength. Understanding its limitations and considering additional indicators can provide a more comprehensive and accurate picture of the real estate landscape. By taking a broader approach, buyers, sellers, and policymakers can make better-informed decisions that reflect the true health of the housing market.

If you are uncertain with the market performance data, have a chat with our buyers advocates.

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