Bursting Harry Dent’s own bubble- John Edwards

The recent predictions by US economist Harry Dent, claiming that Australia’s ‘property bubble’ is going to burst and that prices will be slashed by half, is somewhat an extreme view.

Though it pays to be aware of these economists and the alarming claims, which pop up from time to time, it pays more to check the data they are providing as proof.

Dent is saying that US real estate prices will fall by 60 to 65%, Australia by 50% and that stock markets and China will crash – heralding a new ‘Great Depression’.

But his claims don’t appear to be based on any data – there are little to no facts supporting that we are in for a depression.

Dent offers up no hard explanation for his predictions, apart from the income to house price ratio, and this is very high in a lot of cities where people want to live such as Sydney, Melbourne, San Francisco, Los Angeles, New York, Auckland and London. The reality in these places, is that there are rising populations and limited supply of housing in their most popular areas.

The ratios are of course much lower in less high-demand areas where there is slower growth, or where populations and prices drop when an industry such as mining or manufacturing goes into decline. Big cities however, are much more insulated as they have many economic strings to their bows.

If anything, Australian markets are getting stronger.

While residential property in many of our capital cities could now be deemed borderline ‘unaffordable’, I would contend that because a market has an asset that is somewhat unaffordable does not mean that it is overvalued.

Value is after all a function of the preparedness of a buyer to pay a price for the asset based on its unique attributes and its scarcity. So, while there are buyers at the current price, it is not overvalued.

Australian capital cities are unique in that our populations are generally concentrated in them. And, due to the cost of providing infrastructure to new land areas, our cities do not easily provide supply. Populations in Australia are growing and hence there is always some level of demand for housing assets.[sam id=41 codes=’true’]

Unaffordability is generally a measure based on the capacity of a median family to be a first home owner.

There are many buyer types in a market, including investors and existing home owners.

An unaffordable market simply causes the type of buyers in the market who are active to change.

An unaffordable market for the first home owner simply causes a higher level of families to rent.

A population in an unaffordable market finds solutions to making a market affordable. For example, they may increase people density per dwelling, or alter the size of dwellings to reduce costs.

They don’t tend to sell into the market because it is unaffordable unless they have to as a consequence of unemployment or similar income failure.

But this point is the important issue: whilst there is no significant oversupply due to selling pressure or development of new properties, the increasing population will hold demand at current values and consequently our property markets will not be overvalued – and therefore we are not experiencing a bubble.

To be honest, I am not hugely surprised that Dent predicted the GFC (if this is actually true) as his predictions do seem to follow a similar theme.

As with many economist naysayers, one would have to be right about something sooner or later – it’s a bit like predicting a dice will throw a six, if you keep throwing of course it will.

What I would suggest for buyers is to take a long term approach based on the data. Work on the basis that economic growth and prices trend higher and higher over time, and although it may be interrupted by recessions and other negatives, the general theme is up.

It’s important to be on top of these sorts of startling predictions – but take them with a certain level of cynicism.

[post_ender]



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John Edwards

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John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit www.OnTheHouse.com.au/


'Bursting Harry Dent’s own bubble- John Edwards' have 8 comments

  1. February 21, 2014 @ 11:16 am bjfinch

    Dea John Edwards,
    I’m a retired real estate agent and I’m surprised at your response to Dent’s predictions. I could have written Dent’s predictions. I can’t remember one slump where 6 months prior we weren’t like crazy bunnies, lining up en masse to pay a higher price than the man before, and in the old days – gazumping. It’s part of the tell tale signs agents use to predict a downturn on its way. Sure there are other and more intellectual signs, but Dent’s intuitiveness has a pretty good track record. Other tell tale signs? Developers – and the wealthy – sell everything – even the family home. Intellectual responses are welcome, but there’s nothing like feeling it in your water.

    Reply

    • February 21, 2014 @ 11:22 am Michael Yardney

      Thanks for the comment

      The problem is harry Dent predicted the GFC for 10 years in a row. Getting the timing right is part of sensible forecasting, that’s where Dent has had it wrong for 4 years in a row in Australia.

      I agree with you that if you’ve been in the market for a while, you can see signs of the cycle turning. But that doesn’t mean a crash of 50%

      Reply

      • February 21, 2014 @ 10:43 pm Andrew

        Michael, I am surprised that you say that as the first book I read by Harry was the Next Great Bubble Boom covering the 90’s and then The Roaring 2000s, only then predicting a downturn, so I think it is unfair to cast him as a perma-bear. I have been purchasing investment property for over 30 years and like others have seen many fellow investors fall by the wayside who were not prepared for the downturns in the property market. High interest rates prior to the 90’s recession resulted in a lot of business people and investors losing their property to the banks or being forced to sell into an unfavourable market. I read widely, including your books Michael, and I find useful lessons can be found from a lot of different sources, and not all of them agree. Though personally I am not expecting a huge drop in values I will be ensuring I will be able to survive any future downturn by positioning myself carefully and not over committing.

        Reply

        • February 22, 2014 @ 7:50 am Michael Yardney

          Andrew

          I also remember his first book and was very impressed with Dent’s method of “forecasting the future based on demographics.
          But he has been a bear for quite some time now and one of the big faults in his forecasting is he paints all countries with the same brush.
          He says because the US property market collapsed, so must the market in every other country. In my humble opinion, it’s not as simple as that

          Reply

  2. February 21, 2014 @ 12:54 pm Doug

    As a current real estate agent I agree that the signs point to an eventual correction but not a free fall. Cycles come and go and anyone can look backwards for evidence of that. Predicting the future is inherently flawed as there is no certainty of events that have yet to take place. Educated guesses are better than wild claims with little or no evidence. That is when cynicism is always required.

    Reply

  3. February 25, 2014 @ 7:25 am Dean

    PRICE is what you pay VALUE is what you get.

    May I suggest John Edwards has a long hard think about the difference between price and value. He is clearly confused.
    “Value is after all a function of the preparedness of a buyer to pay a price for the asset based on its unique attributes and its scarcity. So, while there are buyers at the current price, it is not overvalued.”

    No John, value is the intrinsic value of what something based on its cash flow or equivalent. Houses can be valued just like an other asset. What people pay is PRICE and it’s based on what preparedness of buyers.

    Reply

  4. February 25, 2014 @ 9:22 am Greg Rice

    I often read articles regarding real estate and investing and have come to the conclusion that majority of financial advisers , not only Harry S Dent live in a bubble, pardon the pun.I am of the opinion you all advise what people want they to hear, let`s face it you also need income to survive!
    I dare say the good people of Geelong, QANTAS,HOLDEN,TOYOTA, FORD, ALCOA etc would not share your warm and fuzzy views, they are probably contemplating how in the near future they will put a roof over their kids heads and feed them( can`t see real estate prices in Geelong going in the general up direction,can you John Edwards?) . Easy rule in life fellas, something is only worth what another person is prepared to pay. NO JOB, NO MONEY,NO SPEND get the drift. If it seems I am a little negative towards advisers, YOU GOT THAT RIGHT!!!!, had dealings with a couple over time and life is a lot better without them. :) have a good day

    Reply


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