It is perplexing for some sellers when their property doesn’t increase in value as much as the median price. It begs the question, “What is the median price anyway?” Firstly a couple of brief points to set the scene.
There are several different asset classes including shares, fixed interest (bonds), cash, property, and commodities. With most asset classes, the specific assets are traded purely on price as the asset is numerous and identical. What I mean by this is one BHP share is exactly the same as the next one. It’s not like a fish market. You don’t need to compare two different BHP shares and pick which one you like best. They are all identical. The same is true for a specific bond, or a $100 note, and they can all be traded in tranches at a price. Plus the markets are relatively efficient and transparent, with detailed public disclosure so we can see each day if the market has gone up or down.
For property, no two assets are the same, so there can not be a price based traded market or market index. Listed Property Trusts (LPT’s) are as close as we get, but this is not direct ownership of real estate. So putting LPT’s to one side, it is impossible to create an accurate market pricing index for direct property. The median price is the property market’s attempt to do exactly that, but it has a number of anomalies, which to the casual observer can make it misleading.
Technically the median price is the middle sale price in a series of sale prices organised from lowest to highest and in a world of short and fast information grabs, it works beautifully for the property market. Otherwise trying to explain what is happening in the market can be tedious. However the median price has now taken on the persona of the absolute or pure market price indicator, so we need to be careful when using it to judge the strength of the property market. In the absence of anything better the median price is helpful, and over time it shows a relatively consistent trend, but there are several chinks in its composition;
- The physical nature of some property changes over time eg. There where no Level 38 penthouse apartments in 1995 but now many high rise apartments form part of the median unit price so the median price has gone up, in part because the actual assets making up that price index are better.
- It could be a small data set (few sale prices) which would skew the number
- The median price is only of property sold in a given time frame, which is a very small sample set of the entire market.
- Weekly or even monthly median prices can be volatile, again due to the small data set.
- The median sale price from one period to the next are comprised of completely different properties.
The property market is opaque at best and pricing is not an exact science. Qualified valuers often disagree on a property’s value, and auction prices often surprise everyone, which demonstrates the subjective nature of property pricing. This all demonstrates the importance of good advise and spending time to understand your specific asset and market well.