What does median house price mean, how is it calculated and how can you use the median house price figure to analyse a potential investment area?
What does Median House Price mean? When you’re researching a suburb and you see the term Median Price or Median House Price or Mean Price, what exactly does that mean?
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow properties and helping you to analyse suburbs. Median Price is something that is very common in a lot of different online tools such as onthehouse.com.au or yourinvestmentpropertymag.com.au has a top suburb section. They often talk about the median price of an area and I want to explain what that is and what you can really use that data for.
The Median House Price is the sale price of a property in the middle of a range of properties ranked from lowest to highest. So if you have a bunch of properties that sold in an area, you first rank them from lowest to highest and whatever property is in the middle, that is your median price.
In an oversimplified example, let’s say we have 3 properties that sell in an area. You’ve got a property that sells for $95,000, a property that sells for $105,000 and then you’ve got a property that sells for $400,000. You would arrange them in order from lowest to highest; so $95,000, $105,000 and $400,000. And the property in the middle would be the median price for the area. In this simplified example, it would be $105,000.
If you were to take the Average Price of the area, that’s a different calculation. With the average price, you combine the prices of the properties and divide by how many properties they were. So you would add $95,000 to $105,000 to $400,000; which would give you $600,000 in total value of property sales in the area. You would then divide it by 3 – the amount of properties that sold – and you would get an average sale price of $200,000.
Now, why is the Median Price used so often instead of the Average Price; which we would assume would be more accurate? The reason that I believe the median price is used more often is because it gives you a more accurate example of what the bulk of the market is selling for. In our previously oversimplified example, the average was $200,000; which was the correct average but didn’t really represent anyone in the market. Whereas, $105,000, it clearly represented the majority of the market.
How are median house prices calculated for the area? Well, generally, property tools will take the sales over the last 12 months of that area. They’ll put all those sales together, arrange them from lowest to highest and whichever property falls in the middle, that will be the median price for the area.
Sometimes you will see results that say “NA” or “Not Applicable” in terms of median price. Now, if there’s less than 10 sales for that type of property in that area, most property tools consider this to be not enough data to give an accurate enough result so they don’t give you a median price for the area.
So what can you use median house price for? Well, most people don’t advise you to use median house price in order to track the growth of an area. And just because the median house price of an area has changed, doesn’t mean your property value has changed. You may have the median house price of an area and then in the next 12 months, there’s a lot of properties on the low end of the market that are sold.
The median house price may drop because a lot of those low properties in the area have sold. But your property won’t necessarily decrease in value. The market hasn’t changed, it’s just the types of properties that happen to go on sale in that 12-month period were worth less and therefore it looks like the median price for the area has gone down.
So, median price isn’t a great way of tracking how your property value is changing or a great way of tracking how the area is changing, unless you have a large volume of sales. So you can be pretty confident that the median price is going to be pretty close to the average price for the area.
What I do find median price to be useful for is when you are looking at multiple different areas to get an understanding of how expensive is this area. And also, when you’re looking at investing in property, to say the property that I’m looking at, how close is it to the median price of the area? Is it below the median price? Is it well above the median price? And if the property is well above the median price, that means I’m paying for a topnotch home in the area and it might be harder to sell. If my property’s around or slightly below or just slightly above the median price, then I can presume that a lot of people in the are will be looking for properties around that price.
However, it’s always best to back this data up. So if you are serious about investing in an area, it’s better to look at previous sales history and comparable sales of the property that you’re looking at purchasing rather than just using the median sales data for the area. So if you’re interested in a property, then go ahead and look at the previous sales in that area for properties similar to yours to try and understand, “Okay, is this property in the right value range? Am I overpaying for this property?” All of that sort of stuff.
So, median price, it’s a useful statistic for some broad, sweeping assumptions on an area. But it’s not really useful when you start getting granular and you’re really serious about investing in an area.
I hope that that has explained to you what does Median House Price mean. And also, what can you do with the median house price to make you a more educated investor and to lower your risk. If you want more information on how to research a suburb – analyse a suburb and understand whether or not it’s a suburb that’s likely to grow in value or whether it’s a sinking ship that you should absolutely run away from and not invest in – then I have just released a course on suburb research which you can check out, go to onproperty.com.au/suburb.
In that course, I take you through a 7-point checklist. This is a 1-page checklist – really easy to fill out. I go through it and I show you the 7 points that you need to look at at each suburb that you’re interested in to get an idea of the overall performance of that suburb. And to look for red flags in the area that show you that this is a suburb you should definitely not invest in.
That 7-point checklist is a great way to minimise your risk when investing in a suburb, investing in an area. It will really help you understand how area A compares to area B compares to area C, etc. You can check that out, go to onproperty.com.au/suburb.
Until next time, stay positive.