Statistic

Quote "There are lies, damned lies, and then there are statistics!" Source unknown.


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How do Estate Agents make it seem prices are always going up?

How do Estate Agents make house prices seem to be going up, even though they are actually going down? Here's how they do it:-

Trick 1 Change the timescale of the arithmetical average

  • In January prices rose by +2% per month - Estate Agents says "last month house prices rose by 2%"
  • In February prices rose by +4% per month - Estate Agents says "last month house prices rose by 4%"
  • In March prices rose by +6% per month - Estate Agents says "last month house prices rose by 6%"
  • In April prices crash 20% - Estate Agents says "last month prices urgh... we cannot say fell 20%! So the Estate Agent changes from monthly figures to quarterly figures i.e. (2+4+6)/3 = +3 excellent! Estate Agent says "last quarter prices rose by 3%!!!

But you say, they cannot keep doing that indefinitely. Oh yes they can!

  • In May prices crash another 20% - Estate Agents says "Between January and March prices rose 3%.

This statement the agent can keep running for ages. This practice is not reserved for estate agents; investment fund managers do it all the time - they simply choose the year they did best and keep advertising it. "Between 2001 and 2002 the fund grew 40%" Oh yes but what about last year? Fell 60%! Finally, when things get desperate they resort to forecasting.

Trick 2 Change the location that the arithmetical average applies to

If the Estate Agents is trying to sell you a house in say a depressed part of Manchester, while in the rest of the country (London in particular) house prices are booming then they may quote you the average house price rise for the country. This seems strange as estate agents are always telling us that it is Location, Location, Location, so why include house prices for London when you are buying in Manchester!!

Trick 3 Change the average

You can't change the way you calculate the average! Oh yes you can, and it is often done especially when politicians talk about pay! You simply choose which average (mean, mode or median) gives you the best result. For example, lets assume we have the following sample data for house prices.

Price of House Number of Houses
£200,000 40,000
£400,000 20,000
£1,000,000 39,280
£5,000,000 500
£10,000,000 20
£50,000,000 2
Total 100,000
  • Now the Mode is the one that occurs most often and is £200,000.
  • The Median is the one that is in the middle and is £400,000 i.e 40,000 buyers above and 40,000 below them.
  • The Mean (sometimes called the arithmetical average or simply average) is calculated as follows:-

(40,000 * £200,000 + 20,000 * £400,000 + 39,280 * £1,000,000 + 500 * £5,000,000 + 20 * £10,000,000 + 2 * £50,000,000) / 100,000 = £607,800

So when the estate agents quotes average house price be careful to know which average they are quoting.

As an aside politicians do this trick all the time, if they want to make people seem highly paid then they use the Mean however, if the want to make people seem poorly paid then they use the Mode. If politicians want to make inflation seem high they quote the RPI if they want to make inflation seem low they quote the CPI! If the Bank of England had used the RPI when setting interest rates then maybe we would not be in this mess! However, that would have required Gordon Brown to tell the Bank of England to use the RPI and we all know which index Gordon picked don't we!

Note: the values used in this example are not real - they are used purely to illustrate the point.

See also

References:

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