Many people get confused over the definition of what ‘median price’ stands for as it is often confused with the term ‘average price’. Here are the basic definitions:
Median A typical value that is identified by arranging a set of numbers in an ascending or descending scale and selecting the middle number (if there are an odd number in the set) or the arithmetic mean of the middle two numbers (if there are an even number).
Average (mean) An average obtained by adding together the individual numbers concerned and dividing the total by their number. For example, the average of the numbers 5, 10, 15, and 22 is 52/4 = 13.
To illustrate the difference between the ‘Median’ and the ‘Average’ prices of property, I have listed below a hypothetical list of the selling prices of seven properties in the same suburb.
Prices of each property sold
|Median Price||Average Price|
The middle price that has equal number of higher and lower prices above and below it
The sum total of all properties, divided by the number of properties
$3,550,000 / 7
From the above table we can see the difference between median and average. In real estate it is more common to use the median price as this price is more likely to represent the typical price. The average price is more likely to be skewed by a few unusually low or high priced properties. The more properties there are in the sample size the closer the median and average price will be in relation to each other.
You should strive to buy your investment properties at or below median price to best represent fair value and make sure you are not over capitalising by spending above the typical market values.
This will give you the best possible chance of obtaining great capital gains in a rising market and minimising our downside in flat or declining markets.