Friday, 27 June 2014

The Trouble With Averages

Averages are useful. So are percentages. In each case it is easy to be missing something vital. Figures in the News today illustrate the point.
The News media is currently exercised about the rise in UK House Prices which is about 6% UK wide. The point of the news piece however was that it is not the same all over the UK and they went on to illustrate it and comment about a lag in movement between London, the South East and elsewhere. 
This is a demonstration of the obvious but the figures were interesting. Some boroughs in London have seen rises of 25%. Others have not. Overall the London figures are about 18%. Merthyr Tydfil however has seen a 13% drop in its values. 
Another example is that the average wages in the UK are about £26500 pa. 
What do these examples tell us? Well, not very much actually unless you know more. With averages the whole axis is taken into account. Major captains of industry and top flight footballers are included as well as those on basic wage. If we were to leave aside the top slice and the bottom figures somehow, we would have a more realistic benchmark. However there are more people on lower wages than there are on top salaries, so that is an interpretation skew. 
With the percentages example 13% of the value of a house in Merthyr (ave £60k) is a feather in the wind against 25% of the value of a house in a central London borough. Again though, the prices are only there because people are prepared to pay them; or not, perhaps. That brings in local wage rates to the equation. 
Perhaps a better way to measure things is to consider how many times the price of houses is compared to the average wage in the area. It appears to be about 10x unless there is a particular reason for skewing the calculation in an area that has no employment for example. Uk average house price is about £250,000 or just a shade under 10x of the average wage. 
In Wales the average wage is around £19,200, incidentally the lowest of any of the UK regions. In SE Wales it is higher which shows the pointlessness of comparisons within Wales as a whole. The house price average is £167,000 but around £210,000 in Monmouthshre and £180,000 in Cardiff. If you take out the effects of the different areas to measure like for like by smaller areas the calculation still works. Another skew is that the basic rate tax allowance means that a low wage earner keeps a greater percentage of wage. Or is that playing with percentages again? 
Wages and salaries are not the same as incomes of course. The household net income is probably the only figure that makes any sense. You could then match that with a figure based on cost of living in a particular area. 
It's a muddle of course and wide open to interpretation. If you measure quality of life with some other measures thrown in, then SE Wales is not a bad place to be. 
Next time you read some sensational article on house rises or wage rates, take it with an ounce of interpretation. 

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