Eureka Correspondence

Looking at house prices and thinking about the future.

Are house prices cheap?

I used to enjoy Adam Carr's contrarian approach, however, he wrote a piece arguing that a high AUD was actually good for the Aust economy, including manufacturing (see Why the $A has further to run, May 18).

Now claiming Australian house prices are cheap is an absurd position to take (Why Australian house prices are cheap, June 1). For a start, he compares our house prices with other countries on a $/m2 basis, which ignores the fact that most Aussie houses are about 3x larger than the apartment dwellers in most populated cities.

I thought I would chase down his McKinsey data source of Table 1. For a start, he has deleted the colour coding from Table 1 (at page 45 in McKinsey report) which actually gives Australia a red alert colour code. Then look at Exhibit 21 page 50 in the report - comparing Debt Servicing Ratios (the proper measure of affordability) and showing Australia the second worst after Malaysia. The emphasis of the report is that the countries with high level of household debt (Australia as one of the worst) are not sustainable and at high risk, requiring government policy to intervene. Completely opposite to Carr's take-out!


Adam Carr’s response: Thank you for your letter.  The property discussion seems to evoke strong emotions around the nation. People have strong feelings on the subject. If you are uncomfortable investing in property or think it is expensive then don't invest in it. The reason the debate is so heated, I suspect, is that many people who think property should have had a crash by now - or is at crazy prices -  aren't content to sit out of the market and leave it at that. They appear to get angry if other people see value in something they don't see - and wish to invest in it. Yet this is how a market works. This is why we have buyers and sellers.  If you don't think the market has value, that's fine - don't invest in it. I think - and many other people do to it seems - that the market has value and that property is a great long-term investment.

As for the McKinsey data, I wasn't reporting on their research. I was simply using their data. As it happens I don't agree with many of the conclusions they came up with, although it was a good research report.  So for instance debt servicing, including principle is misleading as a measure of mortgage stress. This is because a large percentage of Australian mortgage holders are ahead on their repayments. So my piece was not a commentary on their research - they simply had great data.  

Thinking about the future

Timely chat on Tesla (Tesla: It's all about the battery, June 1). Timely as it matches a few themes some of us have been banging on about at work. There’s lots of talk in my office on the “future” – coal mining, clean energy, climate change, robotics, economic modelling, stranded assets, housing bubbles, retirement, etc.  All the stuff you have been covering in your excellent website and weekend briefing, so I have been looking all knowledgeable around the smoko table, thanks!

However I now somewhat hesitantly out myself as a bit of a "random walk down Wall Street" junkie. So obviously I am into ETFs, although I have a fair swag of LIC in the form of Clime Capital and have finally filled out the forms to buy international stock.

So I have been telling the blokes at work, that I would write to you requesting some research on ETFs or LICs that cover some of the big “future” themes, clean energy, robotics, AI, aged care etc. We have made a bit of a start but are out of our depth.


Editor’s response: Thanks for your letter. Our new LIC analyst is starting next month and will keep this request in mind. ETFs are usually a little broader than just covering robotics or aged care. For example, BlackRock's iShares offers global healthcare, telecom and consumer staples ETFs. BetaShares offers an agriculture ETF.

Our international equities analyst Clay Carter has written about some of these themes – his specialty is picking individual stocks. You can see a full list of his recommendations here. Links to his articles are here and you might be interested in this story on robotics: Cashed-up Fanuc, February 23. 

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