Henderson.

Why You Should Never Trust the Median

 Across Australia at the moment, we’re starting to see some very impressive house price increases.

This year alone, we’ve seen median house prices increasing in every city in Australia at a rapid pace.

While we all like to track median house prices when they’re rising, it’s important to understand that on a suburb or even city-wide level, the median price is not always a good indicator of what’s really happening.

This is most obvious when you breakdown a suburb that is showing strong gains in price based on the median dwelling value.

The first issue with the median dwelling value is that it generally contains both units and houses. We know that houses and units generally sit at very different price points and attract different segments of the market. Some suburbs can be predominately houses with very few units, while others, like inner-Sydney suburbs, are often mostly units with only a few houses. These large differences can make for very inconsistent readings if you’re looking only at dwelling values.

If you break the median down further and look at houses, for instance, these numbers can still also be skewed. Across most suburbs, there are different segments of the market. We see this very clearly in Sydney, where some suburbs feature properties that are on the ocean or harbour and these types of properties can be priced significantly higher than others in the area.

It’s not unusual to have three or four different sections of a market in any given suburb. When we see that house prices are rising in a suburb, it’s not always clear on the surface where those rises are coming from.

Similarly, the median can also jump dramatically in suburbs that have only a small amount of transactions in a given year. We might see this commonly in suburbs that feature expensive waterfront suburbs. These types of properties will normally change hands far less often and can see large price movements, which can heavily impact a suburbs median price.

If you’re just looking at the median house price alone, you might see a suburb that has been increasing in value by 10-15% per year, when in reality it hasn’t. The gains could have come from only a small section of the suburb at the higher end of the market or be based on very low transaction volumes.

A far better way to assess what is actually going on in a particular suburb is to track listing and sales data over a period of time. When you get a clear picture of what is for sale in a suburb, how that particular stock has been selling and how prices are moving, you’re going to get a far better idea of what’s actually happening with prices in that suburb.

Another good way to get a very clear understanding of the types of properties that are in demand and selling is to talk to agents on the ground. Agents are the ones who are at the coal-face and can clearly see just how much demand there really is in a particular suburb for a certain type of property.

While it is still important to look at median house prices to get an overview of what is happening in the property market, it’s important that you don’t make buying decisions based on those figures alone. Median house price growth is not a reliable indicator and if you make a purchase based on it alone, you could find yourself making a big mistake.