Bursting Harry’s Property Bubble

Oh Harry… what have you done now?

No, not Prince Harry and those Vegas pictures, but Harry Dent – The Doom & Gloom Extraordinaire – who recently wrote in Forbes Magazine, and I quote:

…the greatest housing bubble in developed-country cities starts with Brisbane, Australia…

Excuse me whilst I look around to check if we are talking about the same place. There isn’t another Brisbane in Australia is there?

Read on peoples, it’s about to get personal!

But before we start, here is a fuller account of what Harry Dent said in Forbes:

Around the world, the greatest bubble by far occurred in Shanghai, up 525% since 2000, and in China in general. Mumbai saw a 400% bubble, Dubai 300% and Seoul 205%. The greatest bubble in developed-country cities starts with Brisbane, Australia at 210% followed by 180% in Miami, 170% in L.A. and 165% in Vancouver. There are many cities that could see real estate drop 70% to 85%!

The only cities that had major bubbles and have already seen them fully erased in the U.S. are Phoenix, Las Vegas and Atlanta. No other major bubbles have burst back to where home prices are affordable again, and major cities from Shanghai to London to Vancouver to Melbourne and Sydney, Australia, are still going up or very near their peaks.

These types of very strong areas always have the view that their bubble won’t burst because they are so special – but bubbles always burst. The greater the bubble, the greater the burst — is also a very good general rule, even though the most attractive cities with the scarcest land for development typically are the last to peak.

The real estate bubble is like a popcorn popper with different markets frothing over and peaking at different times, but all will burst ultimately. Given that real estate is so local, the best way to gauge the downside potential of your home or commercial real estate is to find out what it was worth at the beginning of 2000 at best and the beginning of 1996 at worst. If you can’t take that much heat consider selling and renting for the next three years plus.

I mean really, does this guy truly believe what he says? If Brisbane’s house values fell, say 70%, they would drop by over $300,000; and in 2000 the median Brisbane house cost $155,000 and in 1996 it was $130,000. Today,Brisbane’s median price is around $435,000.

As at mid-October, the average Brisbane household pays just 22% of their household income towards their mortgage. This is on par with the proportion paid in the early 2000s and mid-1990s. Re-read Harry’s last paragraph as outlined above.

Even allowing for nominal price growth of 6% per annum (real price growth – minus inflation – of about 3%) over the next three years, the proportion of household wages needed to pay the average Brisbane mortgage in 2015 is anticipated to be about 27% or 28%. Unaffordable?

Where is this bubble Harry? What is going to cause it?

Rapidly rising interest rates? A massive rise in unemployment? Federal Labor re-election? Well that just might! But seriously, WHAT? I know we live in uncertain times but really, give me a break! 70% to 85% falls in value!

What if you are wrong and someone takes your advice, like Dr. Steve Keen for example, and decides to sell and rent? Only to pay more rent every year and have the pleasure of watching their previous home grow in value, and at the same time get increasingly priced out of the market. I hope you don’t take your own advice!

This constant doom and gloom is far more damaging than most spruiks. And it is catching. Heck it must be, even the Rolling Stones have a new song titled Doom and Gloom…GRRR!

And for the record since 2000, according to the REIA, house prices in:

Sydney rose 91% (5.5% pa compound growth) from $337,000 in 2000 to $642,000 today

Melbourne rose 103% (6.1% pa) from $264,000 to $535,000

Brisbane rose 179% (8.9% pa) (you cannot even get your babble right!) from $155,000 to $433,000

Adelaide rose 193% (9.4% pa) from $135,000 to $395,000

Perth rose 201% (9.6% pa) from $158,000 to $475,000

Hobart rose 185% (9.1% pa) from $130,000 to $370,000

Canberra rose 168% (8.6% pa) from $184,000 to $494,000

Darwin rose $200% (9.6% pa) from $190,000 to $570,000

Most of these capital city markets saw their price growth curves peak in the early 2000s and have been largely growing well below long-term averages since then. This has particularly been the case in recent years. And why single out Brisbane?

For the full Forbes article go here.

…………

Michael Matusik is the director of independent property advisory Matusik Property Insights and writes the  Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.

 



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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


'Bursting Harry’s Property Bubble' have 2 comments

  1. November 9, 2012 @ 12:09 pm jim wills

    Lol, stick it to em. Doom and gloom is a disease, that guys got it bad. Property is still the best way for the average Joe to have a retirement worth mentioning. I wonder if he rents, I’ll rent him a house. Owning property is about controling your future, unlike stocks which you have to trust someone else to look out for you. Not gonna happen. I’m off to an auction tomorrow, wish me luck

    Reply

  2. November 9, 2012 @ 6:57 pm Geoff Carter

    Michael – thanks for the real reality check on house prices and affordability. Let’s not forget that these guys often get PAID to create such headlines! S Keen loved being the “expert” quoted in the media – till his somewhat ungracious fall from grace. I tend to agree that the re-election of a Labor Govt would only continue the slide in business, economic and entrepreneurship confidence even further – they haven’t got a clue in this regard (except Martin Ferguson). I see the old chestnut re proposing the abolition of negative gearing is back on the agenda as well – be very interesting to see what affect that would have on house prices and rental levels! However – as investors we all need to be aware of the RISKS associated with any class of investment we choose to enter. In that regard I’m a bit of a glass half full and half empty kind of guy – on the one hand a certain level of confidence based on the FACTS that drive value and growth in the marketplace (a combination of demand, supply, interest rates, wage levels, (un)employment, demographics, psychographics, immigration, birth rate, mobility, business growth – read mining, government policy, etc) and an awareness that EMOTION can affect any investment type which is usually a reflection of external forces that can affect confidence (e.g. Europe’s debt problems – -and USA, slowing China growth, inept government policy, wars, droughts, interst rates, terrorism, footy results, etc etc…). In this regard I’m sticking with your opinion and take the doom and gloom merchants with a pinch of salt unless they can back up their prophecies with hard FACTS!! Thanks again Michael for your insightful comments and researched opinions.

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