real estate – Thomas the Think Engine

Australia’s cheapest house.

Today data came out showing Australia’s house prices rocketing up.

Screen Shot 2015-02-10 at 1.21.18 pm — Source: ABS

The average price for a home in this country is now $571,500. We hear a lot about the homes at the top end of the distribution, places that cost 100 times as much as the mean, like this Mosman Park pile for $57.5 million.

We don’t hear so much about the other end. There must be houses in this country that cost a lot less than the mean. I went looking for them.

This place in outback NSW costs $40,000.

You could imagine living there, stepping out onto the verandah with a cup of Bushell’s tea as the sun rises through the eucalypts, thinking: I made a good choice.

This place 200km away costs $39,000 and I thought you couldn’t go much lower.

Screen Shot 2015-02-10 at 1.28.47 pm — Not pretty, but (presumably) effective.

But I reckon I found the cheapest advertised house in the whole country when I tracked down this one:

Cunnamulla house — Three bedrooms, one bathroom. Large block.

The lack of interior shots in the listing should rouse suspicions, but if you’re game to renovate this place, it’s near to a supermarket, a hospital and a park.

Cunnamulla has a river, and a train station with services twice a week. It’s also host to the Cunaumulla Fella Festival, an annual celebration of rodeo riding, etc. The closest town you may have heard of is Bourke, about 250km away.

cunnumulla map — Surrounded by red dust.

Paying $13,000 for a whole house seems incredible. In Melbourne, that would buy you 2 per cent of the median home, five nights accommodation in certain fancy hotel suites, or a sedan with 156,000 km on the clock.

But here’s where this story goes from being a fun way to think about our crazy housing market to a rather more serious reflection on race and poverty.

Cunnamulla’s Wikipedia entry highlights domestic violence and flooding. Seek has two jobs listed based in Cunnamulla – both social workers, one related to drought and one related to domestic violence. Cunnamulla was the subject of a controversial documentary produced in 2000 that depicted its bleak side, with quotes like this:

“In Cunnamulla, that’s the only thing you can do. Drink, smoke marijuana, fight, look for women and break in. That’s it.”

The most recent news article about Cunnamulla is about a teenage mum who got her scuba license by practising in the river and wants to leave to work on the Barrier Reef. The official unemployment rate is 5.9 per cent, but the region’s population of 1900 supports only 892 jobs, suggesting labour force participation is low.

In short, there’s a reason houses in Cunnamulla – even ones in decent condition – sell for so little. And those reasons are not nice.

This is a country of extremes – not just of drought and flooding rains, but of wealth and poverty. It’s easy sometimes to forget about the poverty. I’m somewhat ashamed to have started writing this post thinking only of the amusement value of a cheap house, and not at all about the conditions that explain it.

Are the interest rate cut and the foreign investment crackdown linked?

In 2014, the RBA was loath to cut interest rates. But in 2015 it came out swinging, beating their previous record by knocking the official cash rate to 2.25 per cent!

Did the big bank decide:

a) the downside of a housing bubble isn’t that bad; or

b) the economy is in such dire shape that we need an interest rate cut even if it inflates house prices into a giant puffy monster; or

c) the risks of a housing bubble can be contained?

Now, option a) seems unlikely. The US housing crisis is still very fresh in the minds of the globe’s central bankers. Just last year the Governor was warning in – for him – very strong terms about the risks flowing from housing.

Option b) is not the answer either. This excerpt from Tuesday’s decision is not penned by an RBA frothing with fear:

“Overall, the Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected.”

So could option c) be the answer? They’ve found a way to contain housing risks?

It was only yesterday that Prime Minister Tony Abbott made a very public announcement about a crackdown on foreign investment in real estate.

“I am a friend of foreign investment but it has to come on our terms and for our benefit. The government will shortly put in place better scrutiny and reporting of foreign purchases of agricultural land and better enforcement of the rules against foreign purchases of existing homes so that young people are not priced out of the market.”

It was hard to process that announcement at the time, being bereft of context and detail. There had already been a crackdown announced. Was this new approach to have a louder crack, or push further down? It was a mystery.

Until the RBA rate cut.

I hadn’t though of a linkage here until I saw the question posed on Reddit. The person who asked the question in that forum sees causation running the other way, with an interest rate cut necessary to accommodate the deflationary effect of the crackdown.

But we know that the order in which things are revealed does not necessary accord with causation. Assuming so is to fall victim to the simplest kind of fallacy: post hoc ergo propter hoc.

The RBA may be betting that keeping Chinese money out of the market will help keep a lid on things.

Will that work? It might. Foreign investment represents only a tiny share of our market. But introductory economics textbooks tell you, economists think at the margin. A few extra bidders for a house can be what pushes the price of that house through the roof.

Think about it like this: if there 100 seat in lifeboats and the ship is sinking, the price of lifeboats will be zero if there are 99 passengers, and start to rise very rapidly if there are 101. The marginal bidder is important.

But that’s just the theory. The reality is that foreign buyers are scooping up very little real estate indeed.

The RBA faces a market where investors are doing a lot of the lifting. They accounted for around 40 per cent of buyers late last year, a record. This interest rate cut could see auctions turn into a frenzy.

Location, Location, Location

You can buy a French château for less than the price of an apartment in Melbourne.

This flat near Spencer Street is priced at $2.49 million.

This château in France is worth $2.45 million (1.68 million euros.)

The flat has two car parks. The chateau is on 24 acres.

Its not even an unusually cheap château. Here’s a 24 bedroom one for 3.6 million euros. And there’s page after page of more modest ones listed for less than a million euros

I find this amazing and just more evidence for my belief that Melbourne property prices are crazy. But in another way, perhaps it makes perfect sense.

France has a château every few villages, and many of them are far from good services. The one above is 3 hours south-west of Paris. If you lived there, you’d probably have to work in Angers. It’s a town of 150,000 people, so the job opportunities aren’t going to be really diverse. The local unemployment rate is 9 per cent.

But obviously, the kind of people who can afford a château tend to live in the city. So this would most likely be a holiday home. Here’s your problem. If you’re after a holiday home in France, you’d choose the French Riviera (Châteaux down there cost more – a lot more) or perhaps the mountains.

Chateau ownership enthusiasm is probably further tempered once you realise the maintenance costs on a building put together prior to the industrial revolution. In browsing the listings I did notice that many of them were “partly renovated.”

Still, with Melbourne property prices where they are, you might be tempted to buy a pile of 18th century French stone and take your chances in the local job market.

But the smart move would be to sample the market first… Through AirBnB I turned up dozens of châteaux for rent on a nightly basis at prices that seem extremely reasonable.

This one accommodates 12 people, costs $1200 a night, and has a moat!

Where in Australia should you buy a house?

The RBA kept official interest rates on hold again today at the record low of 2.5 per cent, while actual mortgage rates are low and falling:

So could house prices actually rise from here? One economist whose blog I read has built a buy/sell indicator. It’s currently on buy.

He reckons house prices will keep going up while the mortgage rate is not much more than the rental yield. He also theorises that Sydney prices rise first, and the rest of the country lifts thereafter. This theory holds water for me on an intuitive level. In the short run, a house in Melbourne is not a good subtitute for a house in Sydney, but in the medium term, perhaps it is. In the long-term, perhaps even a house in Adelaide could be a substitute!

But house prices in Melbourne seem a bit high to be making bold acquisitions for speculative purposes.

Luckily, house prices are very different across Australia. Sydney is way out in front. Perth, Melbourne and Canberra are a cluster. Then Brisbane and Adelaide are limping along at the back of the pack. Hobart doesn’t make the graph but it is somewhere back there too.

If you wanted to buy a house somewhere cheap, which makes most sense?

You’d want to choose a place with strong growth prospects. In recent times, all three laggards (Brisbane, Adelaide, Tassie) have shown a bit of pluck when it comes to the labour market (focus on the yellow lines).

QLD job ads SA job ads

But you want to be careful. Tasmania’s prospects are pretty dire, as discussed in this piece: How long until Tasmania is totally empty?

So which city are people most likely to move to?

Moving to ... — Google Trends says Go North!

The Brisbane connection looks to be the smartest option. Hmm, how much is one of those famous Queenslanders (a wooden house on stilts)?

Turns out you could get one in a great inner-city suburb for $610,000,

(or a perfectly adequate seeming flat in the inner city for $190,000.)

Now, despite its “beautiful one day perfect the next” weather, Brisbane doesn’t rate a mention in the top ten cities ranked by the Economist for liveability.

Melbourne scoops that award every year (Adelaide came 5th this year in results released today). But while we are being open-minded, it’s worth noting that that survey is horribly biased.

If we broaden our horizons we find that Brisbane makes the top 25 list for the much hipper Monocle Magazine quality of life ranking, getting a shout out for its excellent Gallery of Modern Art.

Is that enough to make you want to purchase your own place in the sun?

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