I heard on the radio that Real Estate Institute mentioned that the median sale price has not dropped, hence property prices also have not dropped despite the falling number of sales.
In my humble opinion, I am not convinced. Does the unchanged (or even slightly higher) median price really indicate that price holds up well, even though we have seen a big price drop of the properties sold in our neighbourhood? Having studied a little bit of statistical analysis, I have had a closer look at the magic of “median price”, and would like to show how misleading it can be.
In my example below, I have randomly chosen 21 numbers that could represent the asking prices and they are:
10, 20, 30, 40, 50, 60, 70, 80, 90, 100, 110, 120, 130, 140, 150, 160, 170, 180, 190, 200, 210
Based on this, you should end up with a median price of 110.
Then in my Scenario 1
They are fewer buyers around and the sales volume drops by 30%. Six vendors out of the original 21 decide to withdraw their properties off the market. Let’s assume 20, 40, 60, 110, 120, 190 are taken off the market. I have presumed that the lower-end of properties are affected more because buyers in the low-price range are more likely to struggle in the current high inflationary environment.
As a result, these are the remaining 15 properties’ asking prices.
10, 30, 50, 70, 80, 90, 100, 130, 140, 150, 160, 170, 180, 200, 210
Vendors can’t sell, so they decide to drop the price by 10% across the board. The new asking prices of the remaining 15 properties are:
9, 27, 45, 63, 72, 81, 90, 117, 126, 135, 144, 153, 162, 180, 189
Now that the new median price is 117 after 10% price drop of ALL properties. Rember the original median price was only 110, and now after 10% drop in asking prices, the new median has risen to 117!
In my Scenario 2:
As the market worsens and sale volume drops by 40%, now 8 out of the original 21 vendors decide to withdraw their properties off the market. Let’s assume 10, 20, 60, 80, 90, 110, 130, 210 are taken off from the original market (not scenario 1).
As a result, these are the remaining 13 properties.
30, 40, 50, 70, 100, 120, 140, 150, 160, 170, 180, 190, 200
Desperate times call for desperate measures, so the remaining vendors decide to drop their price by 20% across the board.
The new asking prices of the remaining 13 properties are:
24, 32, 40, 56, 80, 96, 112, 120, 128, 136, 144, 152, 160
Now the new median price is 112 after 20% price drop of all remaining properties. Remember that the original median price was 110, and now after 20% drop in asking prices of all remaining properties, the new median RISES to 112!
I have encountered many real estate agents who tell me that the median price, even though sales volume has dropped by 40%, holds well.
I hope that you can see that even if price drops by 20%, the median price doesn’t necessarily reflect the market is holding up in price terms. In the above two scenarios, the median price even goes the opposite way.
Here are my questions that I am interested in the PT forum thoughts:
1. Does median price really show the true picture?
2. If median price is unreliable, why do you consider that the Real Estate Institute likes to quote and use it to state that prices are not falling?
3. Do you think that the Real Estate Institute should consider publishing “average sale price” in addition to their preferred median price?
I look forward to reading your thoughts.
In my humble opinion, I am not convinced. Does the unchanged (or even slightly higher) median price really indicate that price holds up well, even though we have seen a big price drop of the properties sold in our neighbourhood? Having studied a little bit of statistical analysis, I have had a closer look at the magic of “median price”, and would like to show how misleading it can be.
In my example below, I have randomly chosen 21 numbers that could represent the asking prices and they are:
10, 20, 30, 40, 50, 60, 70, 80, 90, 100, 110, 120, 130, 140, 150, 160, 170, 180, 190, 200, 210
Based on this, you should end up with a median price of 110.
Then in my Scenario 1
They are fewer buyers around and the sales volume drops by 30%. Six vendors out of the original 21 decide to withdraw their properties off the market. Let’s assume 20, 40, 60, 110, 120, 190 are taken off the market. I have presumed that the lower-end of properties are affected more because buyers in the low-price range are more likely to struggle in the current high inflationary environment.
As a result, these are the remaining 15 properties’ asking prices.
10, 30, 50, 70, 80, 90, 100, 130, 140, 150, 160, 170, 180, 200, 210
Vendors can’t sell, so they decide to drop the price by 10% across the board. The new asking prices of the remaining 15 properties are:
9, 27, 45, 63, 72, 81, 90, 117, 126, 135, 144, 153, 162, 180, 189
Now that the new median price is 117 after 10% price drop of ALL properties. Rember the original median price was only 110, and now after 10% drop in asking prices, the new median has risen to 117!
In my Scenario 2:
As the market worsens and sale volume drops by 40%, now 8 out of the original 21 vendors decide to withdraw their properties off the market. Let’s assume 10, 20, 60, 80, 90, 110, 130, 210 are taken off from the original market (not scenario 1).
As a result, these are the remaining 13 properties.
30, 40, 50, 70, 100, 120, 140, 150, 160, 170, 180, 190, 200
Desperate times call for desperate measures, so the remaining vendors decide to drop their price by 20% across the board.
The new asking prices of the remaining 13 properties are:
24, 32, 40, 56, 80, 96, 112, 120, 128, 136, 144, 152, 160
Now the new median price is 112 after 20% price drop of all remaining properties. Remember that the original median price was 110, and now after 20% drop in asking prices of all remaining properties, the new median RISES to 112!
I have encountered many real estate agents who tell me that the median price, even though sales volume has dropped by 40%, holds well.
I hope that you can see that even if price drops by 20%, the median price doesn’t necessarily reflect the market is holding up in price terms. In the above two scenarios, the median price even goes the opposite way.
Here are my questions that I am interested in the PT forum thoughts:
1. Does median price really show the true picture?
2. If median price is unreliable, why do you consider that the Real Estate Institute likes to quote and use it to state that prices are not falling?
3. Do you think that the Real Estate Institute should consider publishing “average sale price” in addition to their preferred median price?
I look forward to reading your thoughts.
Comment