Property prices – median vs. average? – how confusion can arise

The headline of the morning paper makes for dramatic effect - “NZ’s first $2 million dollar suburb!”

All over the country people stumbled over their breakfast to find out if they live or know someone who lives in the named suburb………. Herne Bay in Auckland! The article claims Herne Bay over Remuera as the first suburb where the average price has broken the $2m barrier.

Naturally working in the industry I was somewhat surprised, as I would have thought that the prize would have more likely to have gone to Queenstown. Equally I was surprised as I know there are many properties in Herne Bay that are well below $1m. As of today there are 66 Herne Bay listings on  our website with the highest at $4.95m and the lowest just $390,000 – it is actually a pity that of the 66 listings only 15 have a displayed price – the rest are by “Negotiation” – but that is another story.

What lies behind the headline is as ever as important as the headline itself. For the sales data for these 2 Auckland suburbs provides a very useful example of how insufficient data can  result in misleading statistics. More particularly how average price can be influenced far greater than median price when data numbers are low. Take a moment to see the detailed data for the 2 comparable suburbs of Herne Bay and Remuera.

Herne Bay

In the 12 months from December 2007 to November 2008 there were 44 reported sales by real estate agents in the suburb – total sales value – just under $83 million, resulting in an average price of $1.885 million. The graph below shows the distribution of sales from highest to lowest.

Whilst the newspaper article sighted an average price for Herne Bay at $2.19m, this analysis does not show it that high (the data analysed here is from reported sales provided by the Real Estate Institute – REINZ, the data source is not quoted in the newspaper article). The point to note is that close on three quarters of all sales of property in Herne Bay in the last 12 months were actually below $2m.

When it comes to the Median price as opposed to the Average price the difference is very striking – the median price over the past 12 months is $1.315 million – a difference from the average of $570,000. The reason to find such a big difference is the extreme price of just 2 properties, both fetching over $8m. These 2 properties significantly skew the figures. If these 2 individual properties were removed from the data set – the result of the remaining 42 properties sales would show the median price of $1.310 million (down $5,000) however the average would fall to $1.553 million (down over $330,000). Clearly demonstrating the vulnerability of average price to extreme data points from within a small data set.

Remuera

By contrast the data for Remuera shows a vastly different perspective. In the 12 months from December 2007 to November 2008 there were 315 reported sales by real estate agents in the suburb – total sales value – just on $376 million, resulting in an average price of $1.194 million. The graph below shows the distribution of sales from highest to lowest.

The median price for Remuera over this period was $919,000, a difference of $274,000 as compared to the average price. Just as with Herne Bay there were a handful of very expensive property sales, four of which were over $5m with two of them over $6m.

Whilst as the graph shows these were exceptional they had a lesser impact on the average price. By removing just the 4 which sold above $5m the average price comes down to $1.128 (down just $65,000) whilst the median moves to $915,000 (down just $4,000).

What this analysis seeks to demonstrates is the complexities of reported pricing for property given the diversity of properties that makes up a suburb. Additionally it clearly shows how smaller data sets with an extreme range of data points can significantly skew statistics, especially when it comes to averages and this can therefore lead to some claims and headlines which end up not being totally reflective of the genuine state of the market.