House Price statistics – average or median?

The latest figures by QV show that the average value of a house in Auckland is $1,013,632. It is basically calculated by adding up all the prices of the houses sold in the quarter and dividing it by the number of sales. QV makes a few adjustments but that is generally how the average is calculated.

Real Estate Institute of New Zealand prefers to quote the median house price. Their recent data collected in July indicated the median house price was over $825,000.This means 50% of the houses sold in July were priced above $825,000 and about 50% of the houses that were sold in July were priced below $825,000.
So the median is essentially “the middle number”. Basically, this is how it works. Say the number of houses sold was 5 (actually it was 2520 in July). The sales figures were: $750k , $800k, $825k, 950k, $2m. If you arranged all the sales figures in July from smallest to largest, the middle number is $825k. This is the median.

So which figure is better?

If the data is reasonably symmetrical, then both the mean and median will be similar.

In that case, the house prices will look like this:

 

Bell shaped curve

The median is not affected by outliers or extreme values.
On the other hand, large extreme prices can can change the averages significantly. significantly.
Take our example above, the 5 sales of $750k , $800k, $825k, 950k, $2m. The average would be $1.065m. But if you look at the data, only 1 house sold above $1m and the remaining 4 houses sold under $1m. That’s the weakness of only using the averages – the picture can be incomplete.

But as you may know, if you use both the averages and the median together, it reveals something interesting:
If the average is higher than the median house price, it means there are several houses being sold for very high  prices. The data would like this:

 

Bell shaped curve - mean bigger

If the median is higher than the average house price, it means there are several houses being sold for very low prices. The data would like this:

Bell shaped curve - median bigger

Given the statistics indicate that the average is higher than the median, Auckland’s house market currently looks like this

Bell shaped curve - mean biggerSo it’s not surprising, we are finding articles “Auckland’s 59 million-dollar suburbs” ; “NZ’s newest million-dollar suburbs” ; and  “House prices up and Auckland gets another $2m+ suburb“.

Just a note, QV found that “multiple property owners continue to be very active across the Auckland region – accounting for 45.9% of sales.” This is not surprising. Given the rise and rise in house prices, those with existing equity in their homes are likely to be the ones who can afford to purchase more. Saving up cash for a 20% deposit is not easy. No wonder the PM is recommending younger people buy apartments instead. He said it in 2014 too.

But as I said in another post, not everyone has had a pleasant experience with owning apartments .

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