By Rian Strauss
Averages are great for many things, but when it comes to the Real Estate market, averages can become very misleading.
Below I will explain with hypothetical examples, why as investors and market operators we need to be careful and thoughtful about how and when we use averages.
As an investor, you are looking at a few apartment buildings. You know that the "average" sales price for the area is £350,000 so when looking at the buildings you know in your head you don't want to be a high price "outlier" for the area. You pass on even considering Building A as the prospectus states an average marketing price per unit of £450,000. You decide on further investigating Building B which has a stated average selling price of £375,000 much closer to the area "average"
What can be missed in this example is Building A having most the apartments well below the "average" price at £300,000 being an immensely competitive option for the local area, with a few larger and more luxurious units that still offer excellent relative value to similar larger properties in the area but they bring up the "average" price.
Building B, on the other hand, has all the apartments above the local area "average" price and has far less competitive value when compared like for like. Thus, leaving it as a poor choice in this example.
"Prices in area X are up 45% compared to 1 year ago." This makes for an enticing and engaging statement, but can be very misleading. In this example, the comparison was done for a postcode sector comparing the sales from Q3 2016 to Q3 2015. The "average" sales price was in fact 45% higher, however, this does not mean that the values in the area have risen 45% over the past year as nothing is stated about the stock type being sold, the quantities of properties sold etc. The sales in 2016 could have mainly been new build houses compared to perhaps studio apartments, details in such examples make all the difference. The actual values in such an area could have been declining as was the case for Chelsea last year.
There are several other instances where "average" prices can be misconstrued or misleading if not properly explained. It is often better to use median pricing or even better quartile pricing when looking at larger areas.
When you want "averages" always look at similar stock types in similar quantities where possible. Like for like comparisons and repeat sales offer some incredible insight often overlooked.
Arm yourself with information and always verify where possible.
For those interested in a great example of how "average" prices can be very misleading on a London-wide scale, my friend James Cully wrote a fascinating post about - here -