This makes me laugh every time I see it.
It reinforces that most people are completely uneducated when it comes to the value of real estate.
I know magazines and newspapers use it as a selling point to get people to buy their publications when they advertise the “What is your house worth?” promo.
Yet 95% of home owners (and some investors for that matter) never realise that the supposedly “gold standard” of property values is a complete myth. A lie, misleading and mostly useless in every application.
What is the gold standard for property values?
It's the median house price.
Ask 10 people in the street to explain how they come up with that figure and you'd be lucky to find anyone able to explain it to you.
Can you tell me how they come up with it?
I suppose that's how they keep the masses ignorant.
Once you understand how they come up with the figure, you'll soon realise that it's completely B.S. (Belief Systems).
Don't worry, I'll tell you in this email why.
But let's firstly deal with how they come up with the median house price figure.
Here's an example.
Let's say 5 houses are sold…
House #1: $350,000
House #2: $425,000
House #3: $475,000
House #4: $560,000
House #5: $620,000
The way they figure out the median house price is NOT an average of all sales like some people might think, in which case would be called the Mean House Price.
They way the Median works is they take all sales for a period and pick the “middle” price-point. In the above example it would be house #3, which is $475,000.
If you're a curious person and you actually averaged out the above example, I'll save you the trouble and give you the figure which is $486,000. It doesn't matter either way… they're both completely useless figures.
Let me tell you this… I never use the median price for anything.
It has absolutely zero application to a serious property investor and HERE'S 5 REASONS WHY:
1. THE BANKS never lends you or uses the median house price to determine the value of a property.
For example, in my suburb of Ivanhoe, Melbourne, the median house price is $890,000. The bank completely glossed over this when it recently lent me over $1.5 million to purchase a property in that same suburb.
If the bank never pays attention to it, and they're kind of important when it comes to investing in real estate, then why should you?
Next time you see such rubbish in the paper, you now know it's completely irrelevant.
Property is a generic word, not all markets are the same. And within property markets there are micro-markets that are working away.
What I mean by that is that the pricing of property is not like the share market, an efficient mathematical formula.
That's why within any market you can pick up a bargain if you know what to look for and what your doing.
2. THE AGENTS never use the median house price when it comes to selling your property for you.
Let's face it – the agents are pretty smart cookies. They work in real estate every day and they understand the market better than most novice investors.
I've never had an agent come to me when I wanted to sell a property and tell me that… “Look Jon, the median house price for the area is $550,000 but I think that we can get you $600,000.”
They never do this. What they do, and the banks do this too, is use comparable sales. A far better tool to work out the true value of property than the now foolish median house price.
3. LAND TAX. I wish it wasn't the case, but unfortunately it is. I don't pay land tax on the median house price range, I pay it on what the council believes the land value is of my property.
So the median house price loses out again.
4. RATES. Same again, don't pay them on the median, pay them on the UCV (unimproved capital value).
5. INSURANCE COMPANIES. Imagine if the insurance companies only ever insured you based on the median house price in your area. I know it's laughable, but there would be no business for them and you wouldn't be able to protect your home to its true value.
So stop and think.
I've given you five reasons why the median house price is completely ridiculous – yet somehow it's become the gold standard for property investing.
TAKE NOTE: If you agree with me now that the median house price is dumb, then the next time you see a newspaper article that says, “Property Prices Down By 15%” for any area, you'll realise that that figure too is completely wrong.
You know why? They used the median price to work out their calculation. Beware, it happens on the up-side as well.
So how did the median house price become the gold standard?
I don't know. I suppose it's another thing that's somehow entered our world and after years of acceptance, people think that it has some validity to it.
Serious real estate investors never consider it – my suggestion to you is, next time you see a report or a newspaper article that suggests “How much is your house worth?” – Don't waste your time reading it, it means nothing.