Most property values for an area are shown as the median average, rather than the mean average (see bottom of page for mean explanation)
What is a “median” property price ?
Quite simply it is the mid point of all prices. For example, if you have 5 prices: 100, 200, 500, 501 and 502. The median is the middle number ie: 500 (although the mean average is 360.6)
Another set of numbers may be 498, 499, 500, 800 and 900. Again the median is 500. No change. (although the mean average has become 639.4, an increase of 77%)
Median prices can be affected in two very different ways, one being that if all property prices rise, and houses sell in the same proportions as normal, then the median moves UP in the same proportion as the rises.
However, another way, is that the median can change depending on how many of each property sells in each price band.
A simplified example of this can be shown by using 11 numbers, in two different scenarios:
| Year 1
11 houses sell
Median price is $600,000 |
Year 2
11 houses sell
Median price is $440,000 |
The above shows how all prices rise by 10%, but because more of the lower priced properties sold than the higher priced ones, then the MEDIAN has actually dropped by 27%. This can happen when prices rise, as people may choose to buy something cheaper.
The actual change shown above is that one extra house that increased from $400k to $440k was sold, but the $800k house, that may have become $880k, did not sell. I have used a set of figures in the above to highlight how things can change dramatically, to raise awareness of this situation.
The next two examples will show a more realistic set of houses prices, and with a smaller change, but still something to be aware of.
The second scenario is when prices drop, and if more houses in the higher price brackets sell, than the lower price ranges, as people choose to take advantage of lower prices to get something better, then the median price can actually rise.
| Year 1
11 houses sell
Median price is $625,000 |
Year 2
11 houses sell
Median price is $652,500 |
In this example, prices have dropped 10%, so some people have chosen to buy something in the next price bracket. And the result is the median prices rises by 4.4%.
Using the same figures but with a price increase of 10%, we could get a situation such as this:
| Year 1
11 houses sell
Median price is $625,000 |
Year 2
11 houses sell
Median price is $605,000 |
In this example, prices have increased by 10%, so some people have chosen to buy something in a lower price bracket. And the result is the median prices have dropped by 3.2%.
Conclusion
The bottom line is that Median prices show what people are buying, NOT how individual property values are really changing.
The first “extreme” example above shows that while the Median average dropped by 27%, (from $600,000 to $440,000) the mean average dropped by only 4.45% (from $536,364 to $512,500), even though all individual houses increased by 10%.
The second examples groups showed:
-
- All individual Houses dropped by 10% but the Median average Increased by 4.4%, (from $625,000 to $652,500) and the mean average dropped by 3.13% (from $625,000 to $605,455).
- All individual Houses Increased by 10% but the Median average dropped by 3.2% (from $625,000 to $605,000) and the mean average dropped by just 0.4% ( from $625,000 to $622,500
Mean Average
The mean average of a set of values is the sum of all of the values divided by the number of the values.
For example, if you have 5 prices: 100, 200, 500, 501, 502, the mean is sum of all 5 divided by 5 ie: 360.6
98.1 - 856,671