How important are median prices in determining property values

According to REIWA's latest estimates, Perth's median house price will settle at $525,000 for the December 2017 quarter, with an expectation the median will moderately rise throughout 2018.

But does this mean property values are really rising? The answer to this is not black and white.

Changes in median house, land or unit prices are commonly used as an indicator of price growth and a barometer for market conditions. Many consumers rely on this information as a gauge for property values when buying and selling. Although fluctuations in medians often influence buying decisions, the movement in median price can be out of step with real-time market conditions.

What is a median?

The median is commonly defined as the numeric value separating the higher half of a sample from the lower half.

The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and picking the middle one. In simple terms, the median house price is simply the middle price of a sample of sales for a given period.

It follows then that upward movement in median price can result from circumstances where a small volume of sales, with a higher proportion of more expensive properties, sell during a defined period.

Indeed, a suburb could show a significant rise in median price, yet be in the middle of a market downturn with low sales volumes and falling values.

The median then, is a useful indicator of market sentiment for individual suburbs more broadly and is particularly handy when viewed across a period of at least a year when the sale sample is larger.

How accurate are median prices?

While medians are useful for gauging market trends, they are not a definitive indicator of the entire market. When first home buyers are active in the market, the median price steadies or falls as a result of the lower purchase prices. On the other hand, when trade-up buyers increase their presence in the market, the median naturally rises.

A good example of this is in North Fremantle, which experienced a 19 per cent increase to its median house price in the year to December 2017. Although its overall median had a sharp increase, this did not mean every property in the suburb increased in value by 19 per cent.

The result was due to a larger proportion of sales occurring at the higher end of the value scale during that time frame. It's therefore the composition of sales that influences median price.

If you're thinking of selling and are unsure of your property's value, speak to a local REIWA agent about how properties similar to yours are selling in your area.

Make sure to check out our WA first home buyers guide for more tips on the buying process.