Median price myth- How much is my house worth?

April 8, 2019

I was recently talking to a valuer friend Keith Barry recently about the current market and the ways many sellers and buyers (and agents) view the market and perceive values.

It was a fascinating conversation. After we had it, we came up with a brand new measure we have agreed is a better and more accurate way of establishing a value of a property over Median prices (other than written offers and actual sales evidence which are ALWAYS only known after a property comes onto the market and ALWAYS the ultimate indicator of market value.

We are talking about a measure that is a MORE ACCURATE way of establishing market value today, before you come onto the market than relying on median price growth numbers.

I have tongue in cheek coined and claimed the term, The “BarnesBarry” indicator (read below).

The media love talking “median” house price growth and auction clearance rates etc. as the measure of the local market.

We see a new report come out and REIWA report a particular suburb jumped in median price 18% or something like that. Owners gleefully rub their hands together and think that means theirs has jumped all of a sudden by that amount.

I say this not disrespectfully, but always find if a suburb is reported as falling in a given quarter, these figures are normally dismissed as not relating to my property (Said quite tongue in cheek).

For the record, I DO NOT believe median house price figures in any way relate to the state of the market in the suburbs I work in. Not at all… (Neither up or down).

They talk of an overall homogenised generic measure, but in no way takes into account the individual, market to market differences that can and do occur in a particular suburb, especially those with huge diversity like Applecross, Mount Pleasant and Attadale.

I talk about it in my book, Market Segment. We can cover that in another subsequent edition of my Rant.
So what are some of the typical measures?

Typical methods and measures. All have some value and help frame value to an extent.
1. Median price growth..
2. Average price growth..
3. What an agent says? (Appraisals)..
4. What the market is prepared to pay? (Buyers)..
5. What your friends say?..
6. What you think?..
7. What next door sold for?..
8. A set number you would like?..
9. Bank valuation?..
10. Price paid plus X %..
11. Online bank and property APPS..
12. RP data auto calculator..

TWO BIGGEST CHALLENGES (I will in detail explain why on these two)
1) Median house price AND
2) Online bank indicators/ RP data auto calculator etc.

1) Median house price- MY GRIPE with Median House price as a be all and end all measure is as follows…

Consider this:
Take a suburb that is mature/established. Imagine in a year 100 houses spend $100-$200K each renovating (new kitchens, extensions, pools, alfresco, bathrooms, whatever). Median prices for that suburb boom all of a sudden due to massive injection of capital into a lot of older homes in the area.

Meanwhile, an owner (Mr and Mrs Example, of 23 Smith Street) that owns a home in the street, has maintained it absolutely in original condition 40 years, (even has the original light globes) has spent almost nothing on the home, and so the growth of the median of the area which is pumped up by renovation, improvement and injection of capital may have seen absolutely no change at all in land value of the value of 23 Smith Street in this example.

OR, a development block is sold, let’s say for $1M and subdivided into 2 lots. Two new spec homes built for $700K each on the blocks and the homes sell for $1.4M each. That site is now a $2.8M site and cost $1M on paper. (#$%^&*(*&^%$%^&*). If that happens a lot in a suburb, median house price growth in some quarters would be off the charts, and often is. I fear apartment sales can and do have the same effect.

OR, in a particular period, a lot of high end homes sell or at the other end of the scale, a lot of low value properties sell and the high end doesn’t. Median house prices could be artificially skewed high or low and mean absolute nothing to a typical home in the area.

So sure, use Median as a baseline, but it has to be considered as part of an overall understanding of the market and should not ever be relied on in isolation.

2) Online bank indicators/ RP data auto calculator
I understand averages, calculators and estimates. I used to have one on my website for calculating your own house value. It is still today largely valid, the difference being the owner puts in the figures for estimated land value, house value, replacement cost, less depreciation, adds renovations, adds WOW factor, etc. Subjective I know but it was only ever done as a fun exercise for me…

I have been appraising homes for 18 years. I can do an appraisal plus or minus 10-20% in 1-3 minutes by asking a few questions about a property (A bit like the auto calculators do), site unseen. They might say probable value $1,000,000 and estimated range between $850K and $1.1M as an example.

The buyers sees $850K, the sellers sees $1.1M (or more)…

What is the problem??

I hardly ever have seen 2 homes exactly the same in the areas I work.

They are ALL vastly different.

Those calculators can’t possibly know any renovations, maintenance done or not done, can’t possibly know about individual nuances such as orientation, neighbours, block slope, street appeal, frontage etc. They commoditise a home into a bag of spuds and assume they are all worth a figure based on a price per square metre. They don’t know the specification of the home built. Some homes cost $1,000 per square metre to build, some $5,000 per square metre. Some present like new after 10 years, others look well-worn after 3. Some are dated before they are ever lived in, due to styles or choice of building materials (Which can and do often date as lifestyles change and new building reflects that).

Real Estate Buyers don’t buy things by the square metre…

>They buy the whole thing. All of it. Not component parts. You can’t buy a home by the square metre. You have to buy 100% of it. The total sum. A home isn’t a bag of spuds.

I have found buyers do rely on this measures as a guide, but after they want to buy a home/block will individually assess what they are willing to pay for a property, not based on the rate per square metre it is but based on how it compares to what else is available at a particular time and based on what they feel is fair.

Anyway, that is my gripe/rant.

AFTER Appraising 1000’s of properties, I STILL NEED to step onto a property and have a good look to give an accurate assessment of what I think it might fetch in today’s market.

I assess supply and demand, the current for sales, recent sales, an intuitive sense, is the state of the market going up or down, outcome required in terms of timing, as well as many other factors.

Even then we sometimes get it wrong, as the market always has a say too.

SO WHAT IS ANOTHER MORE ACCURATE WAY?
Here is my description of the “BarnesBarry” Indicator.

1. My indicator or much more product specific than suburb general specific.
2. Let’s take an unimproved original home in a location. (Say a quarter Acre on Ardross Street, Applecross that is single residential), OR a narrow 500 sqm vacant block on the Promenade, Mount Pleasant) OR a near new Webb and Brown Neaves mid-range specification home on 500 sqm OR ANY Comparable example you can think of.
3. What were they selling for in (pick a year) 2008, 2015, ANY (Not only can these things be checked, good agents and many owners can recall and then confirm with facts.
4. EXAMPLE, I know 1000-1072 sqm blocks on good streets in Applecross in middle Earth (I call the middle section near the Primary school that) for $1.5M to $1.75M depending on the orientation, street appeal and a few other factors.
5. What are they selling for today? (Based on the most recent sales evidence, comparing like for like)
6. The answer is, about the same. (11 years later)
7. In this example, has there been any REAL GROWTH???- No
8. For buyers though that like in their own cases sometimes talk things down or talk of market corrections, this will also give an indication that there is NO EVIDENCE of market capitulations in the better blue chip suburbs. Some years they go up a few percent, others, they drop a few percent. Largely prices have remained calm and constant for over a decade.
9. Do that on any comparable property type you like to give you real indicator of what the market has done over time.

If you would like to discuss your property and where it fits into the market, please feel free to drop me a line.

Thank you and see you in the marketplace.