Problem with the Median House Price. Things You Must Know.

If you are in the market for your home or investment property, one of the market pricing indicators you might look at, 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 calculated 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 number, 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 prices of properties sold in a specific area, in a given period of time. IE, it is the price of properties that property buyers and property investors have bought. This is important, and we'll explain why.

The median price is where half of the properties sold 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 or outliers, the median price offers a slightly more balanced view of the typical home value within a market in most situations. It is however, not immuned to bias which we will discuss later.

How is the Median House Price Determined?

Let us now look at this simple example. The sales data of a fictitious south East Melbourne suburb called Wonderland. In this particular period, 5 houses were sold with prices: $400,000, $500,000, $600,000, $1,000,000, $1,500,000. During this period, the median house price is said to be $600,000. $600,000 is the price in the middle number of the set of sold property prices. This is easy to understand.

Now, just like any piece of statistical data, without understanding the definition, source of data and the underlying market conditions in the area, it CANNOT be interpreted in isolation.

We cannot emphasise enough:

Median House Price is just an indication of what buyers are buying.

It CANNOT Be Interpreted In Isolation.

Why is the Median House Price Used?

1. Market Trends: The median house price helps identify trends over time. An increase in the median price over several months or years can suggest buyers are buying more expensive properties. It may suggest a potentially growing demand and limited supply. However, we cannot draw this conclusion without understand the underlying property market and the types of properties that were sold in the area.
   

2. Affordability: For potential buyers, the median house price also provides a quick snapshot of the market's affordability. The median price of a suburb can help buyers determine if there are properties that are within their budget in the area.
   

3. Policy Making: The median house price is one of the many parameters used by governments and policymakers 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 the typical price of properties in the area, it has several major limitations that can lead to misunderstandings and confusion about the market's true condition. Property spruikers proclaiming "BOOM" locations are unfortunately often abusing this confusion to convince buyers that what they are selling are top quality investment properties in "BOOM" locations.

Let's discuss the Problems with Median House Price

1. Reflection of what Buyers are buying. The frequently used median price is simply a reflection of what property buyers are buying in the area. It does not necessarily mean all properties in the area are worth that price. The median price alone, does not indicate where the property market is heading.

   
   

2. Does Not Reflect All Market Segments: The median house price is influenced by the mix of homes sold. For instance, a larger than usual number of high-end, more expensive quality houses sold in a particular period, will shift the median price, likely causing it to rise, even if the prices of most 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 only be reliable when the mix of the types of properties sold remain similar across the periods.
   

3. 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 wrongly interpreted as a sign of a strong market, even if there is an massive oversupply of properties in the area.

   
   

4. Ignores the Types of Properties Buyers are buying. For example, in green field locations undergoing massive redevelopment, it is normal to see massive increase in the median prices, as cheaper, farm land properties are being sold and redeveloped into new houses. As more of these expensive (due to expensive labour and building materials), yet smaller house are being sold, it the Median Price will shift. But does this mean the prices are increasing and thus is a good location for property investment? No. New greenfield suburbs are known for their massive oversupply, high vacancy rates, thus the lower rental. Hardly indicators of a good location for investment. Now, when developers raise prices of new homes in line with higher labour and building material costs, does this mean the prices of older properties will increase? No. It usually does not. An old $400k house, will still be worth $400k, if there are no demand.
   

5. Regional Variations: Housing markets in Australia and Victoria are highly localized. National or even city-wide median prices can obscure significant regional variations. For example, the median price in a city center is vastly different compared to the suburbs. As a result, the city-wide median price will not accurately reflect conditions in local suburb.
   

6. Housing Market Health: The median house price does not provide insights into other crucial factors, such as the number of days properties 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 Good Indicator of Market Strength

Now that we know what a median house price is, and how it is not always a good indicator of house price trends, 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 property development is released in our fictitious suburb called Wonderland. And the project's success resulted in 2 luxury mansions worth $3 million each being sold to wealthy buyers and investors.

Now, these 2 property sales will be added into the list of sold property prices, as follows: $400,000, $500,000, $600,000, $1,000,000, $1,500,000, $3,000,000, and $3,000,000. With these 2 x $3million sales, the median price has now increased to $1,000,000. The $1,000,000 house is the mid point (median) of the list of sold prices.

These two high-end sales have significantly pushed the median price up from $600,000 to $1,000,000, resulting in a 67% increase in median price. Does this mean all other properties in the suburb is now worth 67% more? No. However, sales agents, project marketers and dodgy buyers agents would want you to think so, but it does not work this way.

It's important to understand that this rise in the median price does not indicate a broader market trend. The prices of the other five properties remain unchanged. That initial $600,000 property is still worth $600,000, and no buyers will pay $1,000,000 for it.

Buyers who focus solely on the median price might incorrectly assume that all market segments are experiencing strong capital growth. And real estate sales agents and apartment project marketers will not hesitate to misuse this confusion to convince buyers that apartments are good investment properties, claiming that "data do not lie." This "data do not lie" narrative is misleading. Older properties might have less demand now, and prices could have subsequently decrease.

Understanding the nuances of the market and looking beyond median prices is critical 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 the Melbourne suburb of Wonderland, resulting in the sale of two $400,000 properties. This sold price is lower than the median as these are entry level houses on small lot sizes and with minimum specifications... How will this influx of affordable housing affect the median property price?

Because of these 2 cheaper houses being sold, the list of sold prices are now: $400,000, $400,000, $400,000, $500,000, $600,000, $1,000,000, and $1,500,000. With these sales, the middle of the list is $500,000, and this means the median price is now $500,000.

Sales of these two more affordable houses have pulled the median price down, resulting in a 17% drop from $600,000 to $500,000. Does this mean all other properties in the suburb is suddenly 17% cheaper? No. It doesn't.

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 prices of the other five 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 strong. Similarly, budget-conscious buyers might mistakenly believe that prices in the area have fallen by 17% and are now expecting similar "discounts" on all other properties.

In reality, the $600,000 property is still worth $600,000. Educated buyers will recognize this and offer the appropriate value, while buyers without a good understanding of what the median price means, will lower their offers, based on the misperception of a price drop, resulting in their offers be out-bidded.

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 are often being 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 prestige suburbs such as Mentone and Bonbeach have actually risen by up to 1.8% in the same quarter. In contrast, suburbs with a high concentration of over-supplied apartments like South Yarra, Carlton, and Melbourne CBD have experienced declines of between 1.3% and 1.8% due to oversupply and very poor demand.

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

4. Changing Market Dynamics:

Now, during volatile periods and rapidly changing market conditions, such as during a market downturn, high-end homes are often the last to sell, while more affordable homes continue to be sold. This situation usually lowers the median price, but does not accurately depict the lack of activity (sometimes zero sales) at the high end of the market, which could indicate deeper economic issues.

How do You Understand the Market Strength?

To get a more complete picture of the housing market's health, our buyers advocates tend to analyse 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 faster, suggesting strong demand.

4. Price per Square Metre: This figure is seldom used in Melbourne, but it 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. Do note that different data sources can have different definition of this, and the number is not directly comparable across different sources.

6. Matrix of the above data: Segmenting the above data is something obvious, but which is often overlooked by all buyers. Buyers do not have enough knowledge to segment the above data properly, often resulting in wrong interpretation and analysis of the market condition and property value.

7. Boots on the Ground Validation: The data only tells a historical snapshot of the property market. This data can often be 3 to 12 months late. Some popular indicators such as population, income, socio-economic indicators can be more than 7 years late. This article will explain why. Nothing beats a "Boots on the Ground" visit to the location, familiarise yourselves with the up-to-date dynamics of the property market in the area. If you are buying in Melbourne but are unable to invest these time and resources into this due diligence, our local buyers advocates are more than happy to assist and provide that information. We buy across the entire Melbourne and Victoria and have extensive local knowledge in most popular suburbs.

   
   

What's next?

With this understanding of the relationship between 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 embarrassments to do a bit more research and equip yourself with more relevant information before you get sorely disappointed.

Why is the Median Price Used, Despite Its Limitations?

The median price is frequently used in real estate reporting because it is easy to understand and interpret (and misinterpret). 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 often be confusing for readers. Therefore, it is simpler and more effective to present a single, easily digestible number, even though most readers do not fully understand how the median price is derived.

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 often 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 numbers.

Conclusion

While the median house price can be 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.