Which house price you should trust: median price or average price?

You might often hear median price and average house price. What is the difference between median price and average price? Which one you should use as a reference when you want to purchase properties?

Difference between median price and average price

Averaging adds up property prices in a list and divides by the number of properties. The median price is the figure in the middle of a range of numbers arranged from lowest to highest.

So, if you have  7 properties, the median price would be the price of the 4th property from lowest to highest. There will be three properties below it in value and three properties above it in value.

Median and average prices can be quite similar if the prices form an even range from high to low. However, if the list of  7 properties has  5 low priced and only  2  high priced properties, the median value will look low compared to the average value. Conversely, with 2 low priced and 5 high price properties, the median value will be higher than the average value.

Here’s a simple example. Consider a period when seven houses go on the market and sell: one each at $100K, $125K, $150K, $193K, $215K, $240K, and $250K. The median sale price is $193K while the average price is $184K.

Which price I should trust?

The fact is that both median and average house prices can be misleading.

For example, the exact same 7 properties go back on to the market, but unfortunately, nobody is on hand to buy the first two, and the other 5 go for the same price as last time.  Hence, there are 5 sales occur at $150K, $193K, $215K, $240K, and $250K. The prices haven’t changed at all, but the median price is now $215K while the average price is now $212.6K, and the estate agents will tell you that median price in that area has risen 11.4% and average price has risen 15.5%.

How to use median and average house prices

Median prices are usually quoted by suburb/area or by a time period.  Suburb figures are usually calculated on the previous 12 months. Areas with less than 10 sales during that time don’t give enough data to generate relevant figures.

Comparing different areas with similar median prices can help make better sense of what median prices are all about.

Capital city medians are a good guide for suburban house prices, however houses within five kilometres of the CBD will have a much higher value than the median price for that city.

While median prices can assist as broad indicators and allow comparisons between cities, looking at recent comparable property sales in specific areas will always give the clearest understanding of the market you are in.

The best understanding of property values will be a combination of both median pricing – a macro view – and individual property sales in your target area, giving a complementary micro view.

Download Median House Price vs Average Price example.