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One of the most common statistical measures pertaining to property investment is the good ol’ median price.  Median price reflects the ‘middle’ price in a sequence of prices.  It is important to understand that it is not the average price – which is calculated by adding all prices together and dividing by the number of prices involved.

The median price is supposed to provide a more accurate reflection (than average prices) of property values in a particular location.  However, based on 20 years ‘real world’ experience, I offer a word of warning.  While the median price does provide a better indication of property price movements, it is only an indicative measure.  In fact median prices really tell us more about the type of property being sold rather than value of property in a particular location.

To clarify how the median (or middle) price is calculated, let’s consider an example -

During the month of August, five houses sold in the suburb of Blacktown in Sydney:

House #1:      $300,000

House #2:      $350,000

House #3:      $375,000

House #4:      $450,000

House #5:      $550,000

To establish the median price, you need to identify the price that sits in the middle of the sequence of numbers.  In this case the median price is $375,000 (House #3).

To calculate the average (or mean) price, add the 5 house prices together and divide by 5 (ie the number of houses in the sequence).  This results in an average value of  $405,000 which is substantially different to the median price.

There are a number of potential problems with median prices including the various ways they can be calculated, not to mention the fact that prices below and above the middle price are virtually ignored – which can be very misleading!

One of the most commonly asked questions is… why do different organisations report median values that are quite different?  The answer to that question lies in the methodology used to calculate medians.

If we consider three well known research-based organisations – the Australian Bureau of Statistics, Australian Property Monitors and Residex – each one uses a very different approach in their calculations which provides different results.

So which one is most accurate?  It’s a matter of personal choice – personally I’ve been using Residex for many years and while I find them to be quite reliable, ‘real life’ is the only accurate measure.  In other words, the value of a specific property gets down to what someone is prepared to pay for it – the market determines the price.

There are two reasons I choose to rely on Residex more so than other organisations:

1. Through experience I’ve found them to come close to reality
2. I like the methodology they use – based on same property sales

The moral to the story is to consider median values as a starting point to your property price research, however just like all your due-diligence, you need to look further to uncover the most up-to-date and accurate pricing information.  The only way to do that is to do what we do as Buyers Agents – get out amongst it, drive the streets, ask questions and uncover the very latest (not yet reported) sales figures for comparable properties.

Want to learn more about Real Estate Buyers Agents and how to develop amazing Australian property strategies?

Claim my popular FREE Report: ‘The 7 Most Costly Mistakes That Property Investors Make And How To Avoid Them’ identifying strategies you can implement immediately guaranteed to save you thousands, available at:

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Great News!  The Reserve Bank of Australia (RBA) has again left interest rates on hold…the ‘cash rate has been on hold for the past 3 months at 4.5% – this is very good news for property owners.

However don’t get too excited because it’s very possible that the big banks will raise rates independently of the RBA some time in the next six months.

Should we be critical of the big banks?

Overwhelming community opinion appears to portray banks as large uncaring bureaucracies with a licence to print money.  While I’m the last one to demonstrate sympathy for the banks, let’s attempt to bring some level of objectivity to the table.

Good banks…

According to the Australian Bankers’ Association Inc, approximately eight million Australians hold shares (either directly or indirectly) in Australian banks and each year Australian banks share in excess of $9 billion in dividends with their investors.  This has a domino affect because these investors spend or invest a good proportion of these dividends thus creating jobs and enhancing economic growth.  Additionally well performing banks provide employment and training opportunities for many Australians AND you only have to look at the situation with US banks during the recent Global Financial Crisis to realise how important a strong financial sector is to Australia’s economy.

Bad banks…

Not that huge profits are a bad thing, however you do have to ask…how big is big enough – especially when the banks increase interest rates independently of the RBA OR fail to follow the RBA when it reduces rates.

Over the past 10 years (to 2009), BIG FOUR bank profits (profits before tax) have experienced HUGE increases, eg in 1999 ANZ was $2,162m while in 2009 the result was $4,380 ( 103% increase) with CBA, NAB and Westpac experiencing profit increases of 139%, 68% and 200% respectively – total profits of the BIG FOUR increased by 116%  (Source: Historical performance – profit before tax (David Richardson in The Australia Institute March 2010)

The future?

Even if rates do rise again in the near future, it is extremely unlikely we will ever see rates as high as the mid to late 1980s and early 1990s.  In fact interest rates are approaching their long-term average which is where the RBA ideally likes to see them.

The reason many Australians are concerned about rates is primarily because (in more recent times), we are used to unusually low rates.  However this situation was never going to be sustainable AND according to most economists, is not good for the overall economy because it creates a false demand. – this is certainly the case with the property market.

When crunching the numbers – prior to making a property purchase decision – we always recommend adding a buffer of 1.0 to 1.5 percent to your interest rate calculation…not that we believe rates will rise that much (in fact we don’t).  However, it’s always better to be safe than sorry and you MUST be as certain as possible that you will not get yourself into trouble by going into (good) debt!

This takes us back to our original question…’will the banks raise interest rates independent of the RBA?’ In attempting to answer that question, we can all speculate AND your opinion is certainly as valid as mine.  For what it’s worth, I believe there will be 2 more interest rate rises of 25 basis points each over the next 6 months – one by the RBA and another by the banks (independent of the RBA).  So I’m factoring a 0.5% rate rise into my (best scenario) investment calculations right now.

The bottom line is that only time will tell, however let’s revisit my opinion 6 months from now and see how close I was.

If you would like to learn more about investing in Australia real estate, visit our website at:  www.ifyl.com.au where you can download your FREE Report…”The 7 Most Costly Mistakes Property Investors Make And How To Avoid Them”

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According to the Housing Industry Association (HIA), the demand for Australian housing exceeds supply by approximately 40,000 each year. For those of us who have studied basic economics, when demand exceeds supply, prices increase. This adds further pressure for house prices to increase which in turn reduces the level of affordability.

Property industry professionals understand and accept that lenders are now under more scrutiny than ever before – with new lending legislation (Credit Code) introduced recently, not to mention the Global Financial Crisis (GFC).

However there is an irony here – especially when you consider this country’s desperate need for housing.  On the one hand it is absolutely essential that Australia continues to regulate its finance industry to ensure we never end up in a situation similar to America. On the other hand, the tighter the lending market becomes, the more desperate our housing shortage.

By way of example, according to a recent survey by the Master Builders Association of Victoria, there is an undersupply of 29,000 homes in Victoria with 5,000 too few homes being built each year. If this continues and you are interested in where Victoria will be in 10 years (the average time it takes for property to double in value), it’s a pretty simple equation: 29,000 + (5,000 x 10 years) = 79,000…that’s a 79,000 housing shortage in Victoria alone.

According to Executive Director of the MBA Victoria Brian Welch, the MBA survey clearly showed the impact of tighter lending practices.

An opportunity to profit

So the question is…how can property investors profit from the housing undersupply?

The answer to this question gets back to basic economics – when demand exceeds supply, prices increase.

The world’s greatest investor Warren Buffet advocates not following the crowd, ie doing the opposite to the majority. In terms of the property market, right now is a buyers market and smart investors are getting into the market, while not so smart investors (the majority) are sitting on their hands.

So cutting to the chase, now is the time to be buying property in Australia BUT with one very big caveat…do your research AND if you’re unsure as to what you’re doing, hire professionals to help.

Even those of us who do this for a living (as professional buyers agents), surround ourselves with a team of professionals including lawyers, accountants, building/pest inspectors, mortgage brokers, quantity surveyors, etc.

Let’s face it, buying real estate is the most significant purchase most Australians will ever make. If you make a mistake, the penalty is both very costly and long-term. So it pays to get it right!

If you would like to learn more about investing in Australia real estate, visit our website at:  www.ifyl.com.au where you can download your FREE Report…”The 7 Most Costly Mistakes Property Investors Make And How To Avoid Them”

Technorati Tags: buyers agent, housing undersupply in Australia, property investment