Why Median House Prices Are Not the Best Indicator of Property Prices: A Focus on Sydney
The property market in Australia, particularly in Sydney, is often analysed using median house prices. While this metric is commonly used due to its simplicity and ease of understanding, it does not always provide a comprehensive picture of the market dynamics.
This article explores why median house prices may not be the best indicator of property prices in Australia, especially in Sydney, and suggests alternative data sources that offer a more nuanced and accurate assessment.
Understanding Median House Prices
Let’s get back to some basic stats first. The median house price is defined as the midpoint in a list of property prices, where half the properties sell for more and half sell for less. It is a measure that is less affected by extreme values compared to the average (mean) house price.
While useful in certain contexts, the median price has several limitations that can mislead buyers, investors, and policymakers. In Sydney, in particular, this stat is of little value to home buyers, or those keen on keeping up with the latest property market movements. Why is this? Read on dear reader…
Limitations of Median House Prices
Lack of Granularity
The main reason the median house price is irrelevant to home buyers is that it simply provides a single figure that represents the middle of the overall market. It fails to account for the distribution and variation of prices within different segments of the market.
Sydney’s property market is highly diverse, with substantial variations in price depending on location, property type, and size. For example, the median price does not differentiate between luxury homes in suburbs like Mosman and more affordable properties in outer suburbs like Blacktown.
Impact of Market Composition
Changes in the composition of properties sold can significantly influence the median price. If there is an increase in the number of high-end properties sold in a particular period, the median price will rise, even if the prices of individual properties have not changed.
Conversely, an influx of lower-priced property sales can depress the median price. This fluctuation does not necessarily reflect actual market trends but rather the types of properties being sold at any given time.
In each of the above scenarios, the median house price will indicate the most active buyer demographic instead of being an accurate reflection of the median house price within the market.
Seasonal and Temporal Variations
The property market is subject to seasonal and temporal variations that can affect the median price. For instance, the spring selling season often sees higher volumes of transactions and potentially higher prices, which can skew the median price upwards.
Similarly, economic factors such as interest rate changes, government policies, and market sentiment can cause short-term fluctuations that do not accurately represent long-term trends.
Exclusion of Other Property Types
The median house price often focuses solely on detached houses, excluding other property types such as duplexes and semi-detached homes. In a city like Sydney, where a significant portion of the metropolitan population lives in semi-detached homes and/or duplexes, this exclusion can lead to an incomplete and skewed understanding of the overall market.
Alternative Metrics and Data Sources
To gain a more comprehensive and accurate understanding of the Sydney property market, it is essential to consider a range of alternative metrics and data sources. These include:
The Hedonic Price Index
The Hedonic Price Index accounts for the variations in property characteristics by using statistical techniques to adjust for factors such as location, size, and amenities. This method provides a more refined measure of price changes by isolating the effect of property attributes on the overall price.
CoreLogic’s Hedonic Home Value Index is one such measure widely used in Australia.
Repeat Sales Index
The Repeat Sales Index tracks the prices of the same properties over time, providing insights into how individual property values are changing. This method eliminates the influence of changes in the mix of properties sold, offering a clearer picture of underlying price trends.
The Australian Bureau of Statistics (ABS) produces a Residential Property Price Index that includes repeat sales analysis.
Auction Clearance Rates
Auction clearance rates, which measure the percentage of properties sold at auction, provide a real-time indicator of market demand and buyer sentiment.
High clearance rates typically signify strong demand and competitive market conditions, while low rates may indicate a cooling market. The rule of thumb is that auction clearance rates of 70% or higher indicate a strong, growth market, whereas below 60% suggests a softening climate.
Sales Volume and Days on Market
Sales volume and the average number of days properties remain on the market before being sold are critical indicators of market activity and liquidity. High sales volumes and shorter days on market suggest a robust market, whereas declining volumes and longer selling times may signal a slowdown.
Examples Within Sydney’s Diverse Property Market
To illustrate the limitations of relying solely on median house prices, consider the following examples from Sydney:
Eastern Suburbs vs. Western Suburbs
In Sydney’s eastern suburbs, such as Bondi and Coogee, the median house price can be significantly higher than in western suburbs like Penrith and Campbelltown. However, the median price does not reflect the differences in property types, land sizes, and amenities available in these areas. Using a metric like the Hedonic Price Index provides a more accurate comparison.
Luxury Market Influence
In high-end markets like Mosman and Double Bay, a few multimillion-dollar sales can skew the median price upwards. This effect can give the impression of a more broadly rising market when, in reality, it is driven by a small segment of luxury property transactions. Analysing sales volumes and using repeat sales indices can help mitigate this distortion.
Impact of New Developments
New apartment developments in areas such as the Sydney CBD can significantly affect median prices. A large number of new, high-priced apartments entering the market can increase the median price, even if prices for existing properties remain stable. Monitoring the volume and price trends of new vs. existing properties provides a clearer market picture.
Implications for Property Buyers
For property buyers, relying solely on median house prices can lead to several potential pitfalls. My top 3 issues for buyers when using a statistic such as the median house price are:
Misjudging Market Conditions
Buyers may misinterpret market conditions if they base their decisions solely on median prices. For example, an increase in the median price might lead buyers to believe that the entire market is experiencing price growth, when in fact, the change may be due to a higher proportion of sales in more expensive suburbs.
Inaccurate Budgeting
Using the median price as a benchmark for budgeting can result in overestimation or underestimation of actual costs. Buyers might set their budgets based on median prices, only to find that properties in their desired area and specification are priced significantly higher or lower.
Suboptimal Investment Decisions
Investors relying on median prices may overlook opportunities in suburbs where prices are rising more rapidly than the median suggests. Conversely, they might invest in areas where the median price is artificially inflated due to a few high-value transactions, leading to lower-than-expected returns.
The Take Home Message
While median house prices offer a convenient snapshot of the property market, they are not the most reliable indicator for assessing property values, particularly in a diverse and dynamic market like Sydney.
Alternative metrics such as the Hedonic Price Index, repeat sales indices, price per square meter, auction clearance rates, and sales volume provide a more accurate and comprehensive understanding of market trends.
For property buyers and investors, incorporating these advanced metrics into their analysis can lead to more informed and strategic decisions. By looking beyond the median house price, stakeholders can better navigate the complexities of the Sydney property market and identify opportunities that align with their goals and expectations.
If you’d like an accurate and nuanced understanding of the Sydney property market, leading to better-informed decisions and ultimately more successful outcomes with your purchase, the Kitty & Miles team can assist you. Please contact us at support@kittyandmiles.com.au