My personal opinion on the overall level of house prices and indebtedness in Australia:

At a headline level, the average price of a dwelling in one of our capital cities seems quite
expensive. The general level of house prices varies from city to city, with Sydney and Melbourne
being obvious standouts on the high side. I think they are also somewhat expensive in Brisbane
and Perth, and particularly so in Darwin. I do not know a great deal of the general level of prices in
Adelaide.
Hobart seems to be a good example of dwelling prices tracking the economic prospects of the
region, but I am saying this as a casual observer rather than as a well informed and researched
commentator. Anecdotally, people do not seem either particularly pessimistic or overly optimistic
about the future of the Tasmanian economy, and the price of a detached dwelling in an average
suburb appears to reflect this in my eyes.
Personally, I would give a fair measure of consideration to the long-term financial consequences of
any purchase I intended to make above a threshold I would consider significant, say, for myself,
$10k compounding returns could mean that a sum such as this, if invested wisely, is worth
significantly more in real terms should I defer consumption over a period of several decades. A
house will generally cost a great deal more than this (I hear there are some great deals going in
Emerald get it quick, before you miss out!). For the overwhelming majority of people the
purchase will require debt, and the payment of interest which cannot be recovered. Rent money
may be dead money, but I am yet to hear that anyone has popularized the phrase that interest on
a house is dead money. You can be sure enough that it is. Increases in the general level of
dwelling prices is necessitating an increase in household indebtedness, and all else remaining
unchanged, an increase in the amount of dead money (from the perspective of the household
Ian Narev might take a different view) flowing in interest to the lenders. Interest rates are at
record lows, and they may go lower still (I think this is quite likely). They will eventually go up I
have no idea when, by how much, or what might be the catalyst for this. It could happen in 3
months, it could be in 3 years or even 10 years. It could happen at todays RBA meeting. I am not
in the game of speculating, so I take a bit of a dont know, dont care approach to forecasting
short term movements. Obviously, the general level of interest rates over 10 years will be of
interest (no pun intended), but I wont be relaxing my long-term assumptions too much unless
something extraordinary would cause me to change my view that low rates will not last forever.
I do think there is some cause for concern about the level of principal that has been borrowed by
households, for whatever purpose, at such low rates, which might be much more difficult to repay
when rates rise, perhaps even only modestly. A sharp rise in a short period of time, such as that
which followed the initial aggressive downward revisions in monetary policy after the collapse of
Lehmann Brothers in 2008, would be very hard for many households to cope with. Nevertheless,
Australians love a good and presently cheap loan.
For whatever reason, whether it be economics, culture, politics, policy or regulatory failure, or a
mix of these and other factors, we as a nation seem to have elected to behave in a manner similar
to that which cause an enormous amount of economic, financial and social dislocation for many of
our western peers just a few years ago. When it comes to household and government debt, we
seem to insist quite literally - on betting the house on what is becoming increasingly shaky
economic ground.
Capital inflows to fund the biggest commodity investment cycle in history are reversing sharply.
Companies, particularly in the natural resources sector, which took on significant debt loads to
bring projects to life, are beginning to come undone under the financial strain of these obligations.
Furthermore, it is increasingly looking as though the investment cycle was overdone, as it
generally is, but by a considerably larger factor than in past periods of expansion. Exploration is
looking to be a thing of the past for iron ore and coal, at least in terms of what it meant 5 to 10
years ago. Projects which were marginal at $100/tonne IO will have to find another use going
forward perhaps as mega-sandpits for the likes of Clive Palmer and co. (although, I understand
he is already building quite an impressive sandpit of his own). Similar observations can be made of
most other significant commodities.
The level of debt which has been taken on within our economy, both by governments and
households, on the back of this commodity super-cycle, is impressive by the standards of almost
any western nation. A lot of this debt is hidden through various accounting slights-of-hand, half-

truths and in some cases downright fraud. Remember, as just one example, the NBN is being
funded by debt, yet the nations accountant would have you believe otherwise! It doesnt matter
what stamp you put on the envelope, the bond certificates mailed out come from the same
address the Australian Treasury. If you think this kind of behaviour is not exactly straight-talking,
then you probably do not want to hear about the way the corporate sector runs its books.
Sounds familiar, doesnt it? The debt is real, and the measurement of the level of risk it poses is
made problematic given presence of derivatives and off-balance sheet accounting mechanics
employed within our financial system.
So where does this all leave us today, with the RBA about to hand down its latest decision on
monetary policy in a few hours, an economy which is slowing with a stubbornness not seen in
decades, and an apparent debt financed boom in house prices in many of our capital cities? While
the good times were great, the GFC woke up the lion of international competitiveness, and it
seems we may have sold the treadmill at the same time as we sold the rocks. It would have been
good if we had woken up at the same time and got into a little bit of regular economic cardio,
instead of returning to the debt buffet after a brief lull in our appetite.
Given that it would seem that it is probably not our macroeconomic prospects which are driving
the general level of house prices higher, it might be one, or a combination, of the following:
A fear of missing out, or of being priced-out;
Encouragement and peer pressure from family members and friends;
The availability of cheap credit looking for a home (no pun intended); and/or
Speculation.
I believe it is a mix of all of these factors. Perhaps there are some others, but I would think they
are relatively insignificant (never discount the possibility that I might be wrong in fact, I would
suggest placing a heavy weighting on this).
I do not believe taxation matters are the real driver, but they sure add fuel to the speculative fire.
As an aside, I do suspect that I could run a highly successful business selling $10 tax deductions
for $15 in Australia. People in this country seem more than happy to lose money to anyone except
the tax man. Perhaps it is a fear that he will not allocate capital efficiently, however I suspect there
is a fair level of misinformation and ignorance contributing to the popularity of some inherently
dumb activities undertaken in the pursuit of some tax-minimised nirvana. I can only suggest that
you book an appointment with your local train-stop bum if you are interested in minimising tax by
losing money do it with sufficiently large sums, and that bum will soon be able to offer you all
the advice you are ever going to need.
When emotional factors override financial common-sense there is often little you can do to steer
the herd away from the cliff. Speculation seems to be an inherent part of human nature, and
nothing seems to incentivise more extreme levels of speculation than large quantities of effortless
money.
I will continue to assess the value of any significant asset before I make a purchase decision. Right
now I think I would find it difficult to be sufficiently comfortable that I was paying a fair and
financially sensible price if I were using leverage to acquire an average dwelling in many of our
capital cities. When you use debt, you need to be especially confident that your analysis is correct,
and then still leave a large margin of safety, as you can never discount that you might still have
been wrong. Even if your analysis is not wrong, matters outside of your control can allow leverage
to wreak havoc on your finances. My preference is to avoid debt so far as is possible. What I really
like to minimise is my obligation to the bank, with the tax man being somewhere down the list of
people I dont trust to do sensible things with my money - probably a few spots below myself.
This attitude will mean I will miss out on a great many opportunities. I tend not to worry too much
about these I will probably also miss out on becoming an astronaut, a surgeon and a lawyer
This does not keep me up at night (becoming a lawyer might). I do know that being debt free is
relatively wonderful (taking license from Sophie Tucker Ive been in debt and Ive been debt free.
Debt free is better). So Im going to carry on missing out, to some degree I do own
unencumbered residential real estate for investment purposes, and it has to date produced a
satisfactory return what I care about is cash, nothing else has any real meaning in the world of
investing. But I have no intention of transacting in the near future, unless someone should wish to

offer some silly price that I cannot refuse. I will ignore Mr Market and his manic-depressive
behaviour in the interim. I would encourage you to do the same.
Spend wisely, avoid leverage and invest only when you truly understand what you are doing.
Otherwise, get yourself an index fund and forget about it you will surely be happier taking this
approach in the long run, and it is likely that you will outperform most professional investors (as a
small bonus). If we are in a bubble there is nothing that you or I can do about it. You can
encourage your friends and family to also make sensible financial decisions, but beyond that I
suggest that you carry on having a good time, developing marketable skills for which there are
good long-term prospects and buying assets (preferably productive ones) only when they are
offered to you at sensible prices.