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Why median not average makes sense

Why median not average makes sense

31 July 2017

Home buyers and investors often have different purchasing requirements. Most experienced investors try to buy property that will always stay leased and will sell quickly if the worst case scenario of a change in circumstances forces them to sell, while many home owners are more concerned about features such as enough bedrooms for their family or a home office. 

 
Inexperienced investors often find it hard to make the transition from home owner to investment purchase. They make it hard for themselves by being too emotional about their investment purchase.  It is hard to buy something they really don’t like, however good the investment potential is. It is not uncommon for novice investors to turn down a property with terrific investment potential and strong rental demand just because they themselves couldn’t live in it. Some end up buying what they consider to be a nicer property, only to find that the tenants have different priorities and will choose more basic accommodation in order to be say, closer to amenities.  
 
Tenants in most areas are looking for value for money. Many want to spend as little as possible on rent so they can save for a property of their own.
 
The strongest demand for both re-sale and rental is usually, by very definition, around the median price in any marketplace or location. Those who choose to invest in the luxury end of the market are usually the first to be hit by any economic downturn. Much of the luxury rental accommodation available is leased by corporations  who, in poorer economic times, can no longer justify the cost of accommodating employees in high rent areas. And high income earners are unlikely to commit to large mortgages or rents in a climate of economic uncertainty with the possibility that salaries or jobs could be under revision. 
 
Median priced properties - those in what you could call middle range of the market - are not as badly affected in either a rental or sales downturn and usually give their owners the best long term return. If they lose some demand from their usual occupiers because young people move back home or families scale down to smaller or cheaper accommodation, they pick up tenants or purchasers who can no longer afford the luxury markets.  
 
Investors should make sure they don’t confuse median with average and end up buying a property that is too expensive for the area. A few expensive properties can distort average sales prices upwards whereas the median is always going to be the mid-point of the market. 
 
Home owners too should remember that a smaller property in a good street or suburb is going to be better for re-sale than a big house in an area that is not likely to go up in value.