Price, Earnings, Property, Housing

As if you needed another measure to tell you Australian house prices are out of whack.

The Price-to-Earnings (P/E) ratio tells you how much people are willing to pay for an asset compared to how much it earns.

Currently, the P/E for the world's 100 largest companies is 26.68.

A suburban Adelaide home worth $1.2M bringing in $750 a week rent and costing $12,000 per year (council rates, insurance, maintenance) has a P/E of 44. [1.2M / ((750*52)-12,000)]

via GIPHY

Over half of Australian rental properties are negatively geared, meaning that earnings are negative. This is often intentional for tax reasons. In these cases, the P/E is negative.

Nvidia, which designs the chips used in modern AI had a (31/7/2024) forward P/E of 44.

So a plain house is valued similarly to a company with a lock on the leading-edge hardware essential for leading-edge software. Hmm.

Let's compare apples with apples.

An aggregate of global commercial property trusts (REITs) has a P/E of 29, as does the Australian equivalent. These aren't just CBD towers sitting vacant until organisations phase out work-from-home, but bustling warehouses, shopping malls, and data centres.

So we have a situation where Australian property is valued higher than Australian property.

Sure, "Hurr durr, number can still go up," but if you're looking for yield or value, there's cheaper places than bricks and mortar.

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