Median price growth can be a big factor in many investor’s decisions. For some, it’s the biggest single factor. (It’s certainly used by the investment media to focus on so-called “hotspots”.) Ultimately this pre-occupation with median prices means that many investors simply focus on these “hotspots”, because you just have to look at the median price growth in those areas and you can see some pretty big numbers.
But do the median prices of those areas really represent the growth in value of the properties involved or do they actually represent something else entirely?
Here is an observation I’ve made before about median prices that I wanted to share with you. Because it might just open your eyes, like it did mine when I realised it years ago.
When a suburb, particularly an inner suburb, goes through the gentrification process, it’s easy for people to consider that it alone can explain the often staggering rises in the median price.
Let’s take where I live, Richmond in Melbourne as an example. If you look at the median price of the area over the past decade or so, you’ll see some quite amazing growth figures. But there’s one thing that the median price doesn’t show you and that is what I call the “renovation effect”.
When an area goes through gentrification, just as Richmond has, one of the most immediate things that goes on is renovations. People spend hundreds of thousands of dollars renovating old weatherboard 2 and 3 bedroom houses, opening up the rear of them to create large open plan living areas, installing pools, renewing gardens, etc, etc.
Some of these renovations can easily amount to half a million dollars or more. And whenever one of these properties sells, it can dramatically effect the median house price for that area. So the median price is not only reflecting the value of the properties being sold, it is reflecting the amount of money that has been pumped into individual houses but NOT ALL the houses in the area.
The key to seeing the real influence of this factor is this – if millions of dollars worth of renovations have been pumped into an area and the median house price DIDN’T go up, you’d really be worried about how the money had simply disappeared or been wasted, wouldn’t you?
The median price of these areas can present a distortion because it does not reflect the true organic growth in the value of the properties in the area, but the renovated growth in the value of the properties. And when this can amount to hundreds of thousands of dollars, then how much of the median is simply reflecting this input?
No one has ever, as far as I know, been able to quantity the “renovation effect” on median prices, but it is definitely there. How much of the rise in median prices it makes up is hard to tell but you can be sure that it certainly does have an effect.
Something to consider before you leap into your next property purchase.