Why ‘median price’ is used in Property or Real Estate?

In our journey for Property or Real Estate investing, we probably often stumble to a news on newspaper or radio that read like this:

“For the last March quarter, the median price of house in this area has increase for 4% while the median price of unit has remained steady” or something like that…

The Terms

The term ‘median’ is statistic term. If we remember our school days, there are 3 important term in statistic: mean, median and mode. While ‘mode‘ is the numbers that occur most frequently and ‘mean‘ is nothing more than average, ‘median‘ is the term for the number exactly in the middle.

For example: let list down the price of 3-bedroom-houses in a street, say:
$330,000 $350,000 $350,000 $380,000 $400,000 $410,000 $750,000

In this example we can see the mode is $350,000 (appear twice, while other only once), the average is $424,286 (from (330k+350k+350k+380k+400k+410k+750k)/7) and the median is $380,000 (the one exactly in the middle).

To determine a median price, we need to sort the number from the lowest to the highest and get the one exactly in the middle. If the list is even number, we just average the one in the middle.

For example: if one more property is added to the list as below:
$330,000 $350,000 $350,000 $360,000 $380,000 $400,000 $410,000 $750,000
then the median price become $370,000 (from ($360k+$380k)/2), mode is $350,000 and mean or average price is $416,250.

The Meaning

So, looking at those prices above. If only 1 number is to represent the whole street, which price is more into the reality?

If we say the average price($416k), it’s probably not really picture the real condition as 5 of those 8 houses are priced under $400k. The average price is only get higher because of one property at the end (probably the luxurious one) has price much higher than the other.

If we use the mode, and tell people “the price of house on that street is $350,000″, then this is also not represent the real picture either, as most of the houses are priced more than $350,000.

Then we can see here that the median price are the best to represent the real condition. If people say the price on that street is about $370k… It’s more realistic, right? It’s exactly in the middle, some higher, some lower, but around that number.

We might say, it’s better to use the average price as the price can go higher and the bank will lend us more money as the valuation will go higher. That’s true… But, remember, the price average goes both ways… i.e: if one of the house got burned down and has no insurance and the value go down heavily, the average will be pull lower as well.

Beside that, there are times that we want the value of our surrounding as low as possible? When ? Say: during land tax valuation, when we are in the position of buying a property, when divorce attorney do the valuation, etc..etc

The point is, by using the median price, we eliminate this high or low bias due to our perception. Also, a change in small number of property will not affect the characteristic of the whole (the median price). In other word, median price is more stable and reliable compare to the other method (average/mean or mode).

Having said that, there are also some condition that give us a bit of disadvantage by using median price. For example: should there have been a lot of growth and sales on the upper part of the market (e.g: houses that has price more than median) but not much growth on the lower part, hence the median will be roughly the same. So, to change a median price , it will need an overall change of that particular area, cannot be just some part of it.

Also, if there are many brand new developments on the area, the median price is usually get pull higher creating some illusion that the area is having a good growth while the real situation is just simply there are some significant number or new property.

Some Tips

• If we want to buy a property, look at the median price of the suburb or are as the first criteria to judge the overall condition. But to see the real/actual growth, purchase the sales price history of that particular property (or next door if the property is brand new).
• Get to know the median price of our area/suburb for our property type. (There will be different median price for house and unit, or even 2-bedrooms-unit vs 3-bedrooms-unit) Then try to make our property above that median, hence we may say that the property is better than the crowd. (or ‘better than average’ although we know now that median is not average)
• Monitor the median price of our suburb at least yearly and you can approximate the value of our property without have to pay the valuer.

Conclusion

• Use median price when comparing property from one area to other area, or comparing property type (i.e: house vs apartment) to one another as this will give us the picture of that area or category as a whole.
• Median price is just the middle price, so there would be equal number of other prices on both side. I.e: if there are say 20 prices higher than the median, there will be 20 prices lower than the median.
• The individual change would not affect the median price much. Only overall change will have significant impact.

— Denis Kristanda