If you watch the financial news, you will often see reference to the median house price. But what is the median house price?

Statisticians refer to the median as a ‘measure of central tendency.’ Sounds serious, doesn’t it? But the median is actually a really simple concept.

The median house price is the middle price in a range of houses. So, if 5 houses were sold in a particular period, then the median price is the third highest price. This is also the third lowest price. Here is an example:

House 1 $400,000
House 2 $450,000
House 3 $500,000
House 4 $550,000
House 5 $600,000

 
The third price in this range (counting from either end) is $500,000. And that is the point of a median price: it is the same regardless of which end you start counting from. It is the middle price. We should call it the “middlian”.

Once the list of prices gets larger enough, then 50% of prices will be equal to or higher than the median, and 50% will be equal to or lower than the median.

A lot of people confuse the median with the average. But they are not the same thing. Consider the following five house prices:

House 1 $400,000
House 2 $400,000
House 3 $400,000
House 4 $400,000
House 5 $900,000

 
In this group, the median price is $400,000 – it is the third price when counting from either end. But the average price is $500,000. This is because the total of the prices is $2,500,000, and there are five prices. $2,500,000 divided by five is $500,000.

This is called skewing the results. One unusual price tends to muck up the average. We see this in many different ways. Let’s say we took Frank Lowy (the head of the Westfield group) and you and three friends. That is a group of five people. Lowy alone is worth $5billion. So, the average wealth in your group is going to be just a little over $1 billion.

Sounds great. But Frank is not known for sharing.

This skewing is the reason why house prices tend to use the median rather than the average price. One rogue price in either direction and the average becomes meaningless.

That’s not to say that the median price cannot be compromised as well. It can, because using the median only makes sense if there are a lot of houses being bought and sold. Let’s say you live in a suburb where only three houses were sold last month. Two of the houses were from the worst street in the suburb, and one of them was a pull-down job. The other was from the best street in the suburb. Here is how the prices looked:

House 1 (pull-down job) $450,000
House 2 $500,000
House 3 $800,000

 
The median price is $500,000. But if you own a home in a better part of the suburb, then this price does not tell you much about what your home is worth. And if you want to buy a home in the nicer part of the suburb, then looking at the median price will just get your hopes up!

So, whenever you hear that the median price has risen or fallen, think for a second what that might actually mean for you. It may not be as obvious as you think.