Beware Median House Prices

After reading the Property Price Guide 2009 in the SMH, I thought that I better post a mild word of warning to punters who think that they have found a 'bargain' in the area of choice.

Get to understand what the statistics mean (as an investor) – prices quoted are the median price ie if there are 100 sales, what did the 50th property sell for? Is this a good indicator of price? Is the average price a better indicator? Is there anything that you need to know behind the stats?

I recall seeing an article in the SMH last year that the median price in one of these suburbs was less than $400k, this year it has 'jumped' to over $500k. Would you be jumping out of your boots seeing that the median had jumped by more than 30%? Not if the bulk of the sales had come from a single major development which accounted for more than 1/3 of the sales and at a starting price of $600k (no wonder the stats can tell a different story). For the coming year there is a projected 10% approx contraction however there are few new developments which will hit the market this year (under construction but will not be complete until 2010 – another spike). Consequently, median prices will suffer a bigger drop than expected (and the punters will feel ripped off).

To add more weight to the argument, you also need to get a feel for a suitable sample size. If a suburb has had less than say 25 sales, it will be very hard to form an educated opinion of value for the area. You may also find that some of the better properties have been withheld from the market or that they have been transacted in such a way that a 'holding entity' has transferred ownership, taking the property with it.

So I would recommend that when researching your area of choice, get down to tin tacks with the agent, ask them to provide the last year's transaction list of all similar properties within the LGA or whatever area you have selected eg all 2 bedroom units, cull out those which don't match what you are looking for (eg older units with 1 bathroom, or brand new units/off the plan, those sold between related parties etc), then create your own ideas for the metrics whether it be median, average, mode etc. That way, you are not being swayed by the gloss, the hype or other factors which the agent will present but you are relying on hard data and your assessment of the market.