Find out why suburb Median Price can be misleading and how Typical Price comes to the rescue.
Median Price is one of the most commonly reported property market metrics. All major media outlets and data providers use it to highlight real estate price levels in capital city and regional markets. Here is an example of capital city median prices plotted on a time series chart.
We can see that since the 2008 GFC house prices were rising until 2017 in the 2 hottest Australian markets of Sydney and Melbourne. Then prices declined until September 2019, at which point the growth resumed. Perth began declining in 2014, with other capital city markets showing moderate gains compared to MEL and SYD in this time-period. Interestingly Hobart prices continued to grow when prices in Sydney and Melbourne were declining.
In this article we will explore whether this metric is a reliable indicator to perform data-driven market research when assessing suburbs for investment opportunities. Before we deep dive into data exploration, let’s first define Median Price.
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What is Median Price?
Median Price is a great way to describe the most common price of properties in a particular area. In contrast to Average Price, which is the sum of all “sold for” values divided by the total number of sales, Median Price uses a more nuanced formula.
We calculate Median Price by first sorting the sales by price and then taking the value in the middle of the list. If the resulting list has an even number of sales, then the average of 2 values in the middle is taken.Alex Fedoseev, HtAG Analytics
This approach avoids data skew problem in the Average Price formula due to outliers.
For example, if 10 properties sell in the 500,000$-600,000$ range and the 11th property sells for 3,000,0000$ it will skew the Average Price towards the higher end property. Whereas in reality majority of sales are on the lower-end of the price spectrum.
The formula gives us the typical value representation of the relevant capital city property market. The capital city Median Price chart shows us a clear trend and change points. There is no ambiguity as to how the prices evolved over time. It is also clear what their current values are (assuming we are at the end of 2019 when the chart data cuts off).
We can conclude that at this level Median Price is the right metric to use when comparing capital city markets to each other. However…
“There are markets within markets within markets within suburbs within states within areas…”Tim Neary, realestatebuisiness.com.au
Although a capital city price trend may be headed one way, the underlying suburb markets can have a different mix of rising and declining price levels and trends. Therefore it is important to always assess suburbs based on price and trend data produced specifically for that sub-market. Not based on the median price associated with the broader area.
We will now go ahead and explore the Median Price at suburb level.
Visualising Median Price at the suburb level
The chart below plots 599 historical sales and calculated Median Price for 3 bedroom houses in the suburb of Trevallyn, Tasmania 7250. Blue dots correspond to individual property sales. The orange line is quarterly Median Price calculated off the back of these sales.
Notice the sporadicity in Median Price values that fluctuate in the 50,000$ range quarter on quarter. If you’re researching this market in 2021, the Median Price will be at 400,000$. However given the sporadic nature of price movement in the past, is 400,000$ a reliable value to go by?
Although the median value formula minimises the impact of outliers, data sparsity can cause artificial fluctuations in Median Price. This fluctuation is not representative of the true median value change quarter on quarter. It is rather noise due to few and far between data.Alex Fedoseev, HtAG Analytics
When compared to the capital city chart, the Trevally suburb chart bears a lot less information in that the price levels are ambiguous and the trend is not easily detectable (although still visible).
Typical Price vs. Median Price
Due to limitations of the Median Price metric, HtAG uses a different approach when calculating typical house values. The resulting metric is Typical Price, which we derive via a process called Data Fitting.
Data fitting is the process of fitting models to data and analyzing the accuracy of the fit. Engineers and scientists use data fitting techniques, including mathematical equations and nonparametric methods, to model acquired data.Source: mathworks.com
The chart below plots the Typical Price for Trevallyn. As you can see, in contrast to Median Price metric the values are non-sporadic and the trend is easily distinguishable.
Price for 3 bedroom houses in Trevallyn remained almost static (with slight decline) between 2010 and 2015. The prices increased from 300,000$ in 2015 to 400,000$ in 2021.
Median Price is a great metric to represent typical values in capital city real estate markets. However, it does not adequately establish prices and trends at the suburb level.
We calculate Typical Price using the Data Fit method. It is a far better metric to use when bench-marking suburb prices for the purposes of market research.
Typical Price is one of the core property market metrics available in all HtAG reports and dashboards. Visit the HtAG Data Dictionary page to discover other relevant metrics that can take your data-driven market research to the next level.