# Property and the median price trap



## kincella (26 February 2009)

I posted this on another forum....since the newbiews were using the median price to discuss falling prices....and of course. it can screw figures way out of proportion...but most report house prices using the median....


copy of email from Jon Giaan, Knowledge source...its a good read and a laugh......banks, insur nor agents no one uses the median price....so why are people here fixtated about it...read on to find out how useless it is
of course it reinforces what some of us have been saying..but it goes a little further....I hope he does not mind me circulating it
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this makes me laugh every time I see it. 


It reinforces that most people are completely uneducated when it comes to the value of real estate.


I know magazines and newspapers use it as a selling point to get people to buy their publications when they advertise the "What is your house worth?" promo.


Yet 95% of home owners (and some investors for that matter) never realise that the supposedly "gold standard" of property values is a complete myth. A lie, misleading and mostly useless in every application.


What is the gold standard for property values?


It's the median house price. 


Ask 10 people in the street to explain how they come up with that figure and you'd be lucky to find anyone able to explain it to you.


Can you tell me how they come up with it?


I suppose that's how they keep the masses ignorant. 


Once you understand how they come up with the figure, you'll soon realise that it's completely B.S. (Belief Systems).


Don't worry, I'll tell you in this email why.


---
7 Reasons Why Right Now Is The Greatest 
Real Estate Buying Opportunity In At Least a Decade: 
http://realestatesuccess.com.au/dymphnas-event
---


But let's firstly deal with how they come up with the median house price figure.


Here's an example.


Let's say 5 houses are sold... 


House #1: $350,000
House #2: $425,000
House #3: $475,000
House #4: $560,000
House #5: $620,000


The way they figure out the median house price is NOT an average of all sales like some people might think, in which case would be called the Mean House Price.


They way the Median works is they take all sales for a period and pick the "middle" price-point. In the above example it would be house #3, which is $475,000. 


If you're a curious person and you actually averaged out the above example, I'll save you the trouble and give you the figure which is $486,000. It doesn't matter either way... they're both completely useless figures.


Let me tell you this... I never use the median price for anything. 


Nothing.


It has absolutely zero application to a serious property investor and HERE'S 5 REASONS WHY:


1. THE BANKS never lends you or uses the median house price to determine the value of a property. 


For example, in my suburb of Ivanhoe, Melbourne, the median house price is $890,000. The bank completely glossed over this when it recently lent me over $1.5 million to purchase a property in that same suburb.


If the bank never pays attention to it, and they're kind of important when it comes to investing in real estate, then why should you?


Next time you see such rubbish in the paper, you now know it's completely irrelevant. 


Property is a generic word, not all markets are the same. And within property markets there are micro-markets that are working away. 


What I mean by that is that the pricing of property is not like the share market, an efficient mathematical formula. 


That's why within any market you can pick up a bargain if you know what to look for and what your doing.


---
7 Reasons Why Right Now Is The Greatest 
Real Estate Buying Opportunity In At Least a Decade: 
http://realestatesuccess.com.au/dymphnas-event
---


2. THE AGENTS never use the median house price when it comes to selling your property for you.


Let's face it - the agents are pretty smart cookies. They work in real estate every day and they understand the market better than most novice investors.


I've never had an agent come to me when I wanted to sell a property and tell me that... "Look Jon, the median house price for the area is $550,000 but I think that we can get you $600,000."


They never do this. What they do, and the banks do this too, is use comparable sales. A far better tool to work out the true value of property than the now foolish median house price.


3. LAND TAX. I wish it wasn't the case, but unfortunately it is. I don't pay land tax on the median house price range, I pay it on what the council believes the land value is of my property.


So the median house price loses out again.


4. RATES. Same again, don't pay them on the median, pay them on the UCV (unimproved capital value).


5. INSURANCE COMPANIES. Imagine if the insurance companies only ever insured you based on the median house price in your area. I know it's laughable, but there would be no business for them and you wouldn't be able to protect your home to its true value.


So stop and think. 


I've given you five reasons why the median house price is completely ridiculous - yet somehow it's become the gold standard for property investing.


TAKE NOTE: If you agree with me now that the median house price is dumb, then the next time you see a newspaper article that says, "Property Prices Down By 15%" for any area, you'll realise that that figure too is completely wrong. 


You know why? They used the median price to work out their calculation. Beware, it happens on the up-side as well. 


So how did the median house price become the gold standard?


I don't know. I suppose it's another thing that's somehow entered our world and after years of acceptance, people think that it has some validity to it. 


Serious real estate investors never consider it - my suggestion to you is, next time you see a report or a newspaper article that suggests "How much is your house worth?" - Don't waste your time reading it, it means nothing.


Signed with Success,


Jon Giaan
Knowledge Source
43 Lower Heidelberg Rd.
Ivanhoe, Victoria
3079
AU


P.S. 7 Reasons Why Right Now Is The Greatest Real Estate Buying Opportunity In At Least a Decade: http://realestatesuccess.com.au/dymphnas-event




--------------------------------------------------------------------------------
.
Ever met a wealthy person who complains and moans about everything ? 

*** The best way to become a millionaire is to borrow a million dollars and have your renters pay it off.
Jack Miller

**** My posts are for experienced property investors only. They are not for the inexperienced or first home buyer. I make no recommendations to buy or sell to the inexperienced.


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## singlefished (26 February 2009)

To be an impartial *educational* posting for the noobs, I'd suggest removing the baltant ramping/spruiking advertising *"7 Reasons Why Right Now Is The Greatest... "*

It has absolutely no relevance to the content posted regarding median price mis-understandings....


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## Taltan (26 February 2009)

I agree median house price is a flawed measurement but where is the better alternative? The banks and agents don't use it because they are relating to a specific property. Similarly UBS would not recommend a stock based on how the ASX 200 is moving. Does this render the ASX200 index useless? Ultimately it is useful to have a measure of general house prices and the median figure provides it. Importantly it is a figure of actual transactions. This makes it more interesting than statistics produced by the REI which are based on agent surveys rather than actual sighted results


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## white_goodman (26 February 2009)

mean is flawed due to be skewed by the extremes...

median is also flawed...

mode is just silly...

they should do it like olympic diving....

take the top 10% and remove it, take the bottom 10% and remove it...

Mean/average the rest


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## gfresh (26 February 2009)

But of course the spruikers never had any trouble using the median when prices were going up now did they? Convenient to jump on its back now as not being reliable.. 

The Median *can be* a reasonable estimate of prices, *if there is sufficient sample size*.. or in this case measured property sales. 

This can be a problem at the moment for some areas, and in some segments with a lack of sales skewing prices up (or down). That could tend to indicate a big problem in a market itself, with not sufficient number of buyers willing to step up to the prices asked by sellers, but that's a different argument. 

Rather than simply 5 sales (yes, prone to error), let's go with a few more. 

$300,000
$350,000
$420,000
$450,000
$455,000
*$460,000* (median)
$470,000
$550,000
$800,000
$1,000,000
$1,500,000

So while there is a couple of low sales, and a couple of high ones, sales are clustering around $460k, which indicates where the action is. Why is this not valid in at least telling you something? Anything else just doesn't have the interest. And if it's something like house prices where a buyer eventually *has* to sell (job loss, divorce, etc) they're in trouble if it's up the top aren't they? 

Prices can be a croc anyhow, unless is goes through an independent authority that measures and publishes sale prices like many other countries. So if the realestate agent or one of those "buy me a report"  agency (who is protecting his own interests after all) simply doesn't want to report a low or unusually low sale into the system, they probably don't have to.

There are obviously other ways to do it.. but soon as you go into standard deviations, regression estimates, and more complex methods I'm sure people's eyes would glaze over. All of little use if you have a small dataset anyhow..


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## nomore4s (26 February 2009)

singlefished said:


> To be an impartial *educational* posting for the noobs, I'd suggest removing the baltant ramping/spruiking advertising *"7 Reasons Why Right Now Is The Greatest... "*
> 
> It has absolutely no relevance to the content posted regarding median price mis-understandings....




I agree, the article is nothing more than spam imo. The bulls didn't mind using median house prices as a guide when prices were skyrocketing through the roof.

Kincella what do you then propose to use instead of median house prices to get a general overview of the market?

IMO no system will work perfectly.


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