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The 'Smashed Avocado' Index
BY SCOTT SHUTTLEWORTH - 13/06/2017 | VIEW MORE ARTICLES BY THE MONTGOMERY TEAM

Last October, demographer and author Bernard Salt wrote that millennial hipsters should spend less on ‘smashed avocado and crumbled feta’ and more on saving for a home deposit. His comment sparked a furious cross-generational debate – the idea that millennials can’t afford to buy a home simply because they spend too much on brekky appeared ludicrous. So we thought it would be fun, and enlightening, to start a blog series called the ‘smashed avocado index’.

The intent for the index is for it to be constructed for each city in Australia on a monthly basis. We take the median price of a house in each city and calculate from a 20% deposit.

We can then compute the number of years an avid avo toast brekky eater would need to wait before purchasing their own slice of the Australian dream.

We firstly assume that the cost of brekky is $12.95 (round to $13). The cost of smashed avo on toast can vary widely but with a guess of $12.95 we’re probably not far off the mark. Hence the cost for a week of avo brekkies is $91.

These savings are then deposited weekly into a bank account earning 5% interest. This is well above what you might currently expect from a term deposit but we’re assuming that rates eventually normalise sometime in the distant future.

The results are in the first table below. Millennials (this writer included) will be looking at a good 22 years to buy a house in Sydney. Sure, we could buy an apartment, which would be cheaper (depending on location), or move further out of the metro area, but still, that’s a lot of missed brekkies!

Hobart is by a decent stretch the best place to live if, as a millennial, you’re keen to get back to your guilty avo indulgence. Here we’d only need to sacrifice brekkies for 12 years.

But wait, there’s more!

Our forecasts don’t incorporate any consideration that housing may appreciate over the circa 15–20 years that a millennial is skipping their morning avo. More brekkies must be sacrificed to account for this issue. We hence add in a gradient against our savings rate in order to approximate future property price appreciation.

But we can also deduct some brekkies if property prices were to fall, dragging down the required deposit. Property prices probably need a correction at some point (my crystal ball is refusing to tell me when, which is a bother….) but let’s simply assume that property crashes by 30% tomorrow and then grows at 2.5% from there on and rerun the results.

130617 graph 2

Hobart’s looking much better now, only 10 years until the return of brekky! However in Melbourne we’re waiting at least 16 years and in Sydney 22 years!

This blog was written tongue in cheek, but we’re sure the message is clear. If the cost of housing is perceived by potential millennial buyers to be too high, the rational consumer will substitute spending towards life’s other pleasures in order to maximise their economic utility.

For the record, the writer has not once ordered smashed avocado on toast for breakfast.



View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



 

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