Harry Dent says the Australian Property Bubble will Burst. Is He Right?

US demographer Harry Dent has been wandering around the country telling anyone who’ll listen to him that Australia’s real estate market is in bubble that will burst and wipe out up to half the value of property, with the Melbourne and Sydney markets being the hardest hit.

 Now Harry comes to Australia ever couple of years, usually when he has a new book to promote, throws the cat amongst the pigeons by predicting Armageddon and in the process gets lots of publicity for his books and seminars.

But is he right this time? Are we in for a property market collapse?

I’ll try and answer this with a Q&A.

 

What’s all the fuss about?

 I’ve not only read the reports, but personally heard Dent predict that our stock market will crash after the Chinese property market crashes.

He said it would happen in the first quarter of this year – so we’ve only got a few months to go and he forecast this would be followed by a crash in our housing markets.

 “The real estate bubble is like a popcorn popper with different markets frothing over and peaking at different times, but all will burst ultimately.”

And he says it with such conviction that I’m sure he truly believes it, but unfortunately the media coverage Mr. Dent has received has caused concern amongst many ordinary Australians.

Lot’s of clients and many media outlets have asked my opinion on these claims and only last night my sister, who knows little about property, asked:

“Is the value my house really going to drop by half? I heard somebody on the ABC say that’s going to happen.”

 So what is a property bubble?

 Investopedia defines it as:

“A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand in the face of limited supply which takes a relatively long period of time to replenish and increase.

Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.”

For mine, bubbles are also accompanied by easing of lending criteria so loans are easily obtained leading to rapid rises in housing credit, with many people who can’t really afford to take on loans speculating and overcommitting themselves.

Are we in a bubble?

The simple answer is NO and property values are not about to collapse![sam id=37 codes=’true’]

Sure house prices are high compared to many parts of the world, but rising prices per se don’t cause a bubble.

What is needed is for the rises to be fuelled by increased borrowings – leverage – which makes the banking system fragile and unstable.

Interestingly Dent made similar prediction in 2011, 2012, and 2013 as did The Economist and Demographia.

On the other hand the RBA and chief economists at all of Australia’s major bank, who have proved more accurate at predicting the swings and roundabouts of the Australian economy, believe our property market is fairly valued and not in bubble territory

By the way…you can see the predictions Dent made  2 years ago in Forbes here. Interestingly they didn’t come true – yet.

Here’s why I think property values are not going to collapse:

Remember for a property market to crash, you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them.

To make our property markets crash – and that’s different to price growth slowing or the normal cyclically correction – we need one or more of the following 4 things.

  1. A major depression (not just a recession.) Nobody (other than Dent) is suggesting this will occur.
  2. Massive unemployment and people not able to keep paying their mortgages. Unlikely.
  3. Exceedingly high interest rates so that home owners won’t be able to keep up their mortgage payments. Again this isn’t on the horizon.
  4. An excessive oversupply of properties and no one wanting to buy them. Other than in a few spots this is not occurring in Australia.

What is likely to happen to property values this year?

 Well located properties in our main capital cities are likely to keep increasing in value. I’ve outlined my forecast for each state in this blog a few weeks ago.

Why do I say this? Well…

 1. Despite the complaints of some first home buyers, home prices are not unaffordable at present.

Both the HIA-CommBank and REIA-AdelBank affordability indexes suggest that housing affordability levels are the best they have been in around 10 years.

Even the Reserve Bank on a number of occasions stated that it is not worried about the level of Australian house prices. In fact they did this last week in their State of the Housing Market Report

2. Our economy is strong and only as recently as last week in its Statement of Monetary Policy the RBA forecast even better times ahead. And despite rising unemployment, close to 94% of people who want a job are gainfully employed.

3. The world’s large economies are having a synchronized recovery.

While the world’s problems haven’t gone away, many of the fears that plagued us over the last few years are now subsiding and with the world’s economy beginning the year on its best footing since the Global Financial Crisis, we can expect general world economic activity to accelerate in 2014.

4. Our banking system is sound, mortgage arrears rates are low at about 0.5- 0.6 % across the country and household budgets are in good shape as we’ve been paying down our debts.

5. Inflation is contained and interest rates are low and likely to remain so for a while.

Low interest rates encourage homebuyers and investors into the property market while at the same time allowing current homeowners to pay off their mortgages quicker.

6. Our strong population growth (around 400,000 people last year) underpins our economy and housing markets. Interestingly most of these new Australians want to live in our 4 big capital cities and in many cases in many of the same suburbs.

7. Other than in a few specific markets (especially Melbourne high rise apartments and new housing estates) we do not have an oversupply of property. If you look at Sydney it has the lowest number of properties for sale since 2008 at a time of strong and increasing demand.

In conclusion:

Of course there is not one property market and as always some markets will perform better than others, but on the whole a mixture of low interest rates, strong population growth, job stability, affordability and increasing confidence will have more people getting involved in property this year.

One more thing… as long as I’ve been investing in property, and that’s over 40 years now, there have been doomsayers and “chicken little’s” warning the sky is falling. And the media has lapped up their stories.

In the meantime while smart investors and home buyers were out buying the right type of property, others who were more cautious were sitting on the sidelines waiting to see how things pan out. While this may seem safe to them, they are likely to miss out on some great opportunities.

It is easy to do nothing … as Donald Trump says: “Nothing is easy… but who wants nothing”.

By the way…I’ll be explaining what I think will be happening to our property markets at my National Property & Economic Market Update 1 day trainings in 5 capital cities in March and April.

[post_ender]

 

 



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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been once agin been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Harry Dent says the Australian Property Bubble will Burst. Is He Right?' have 21 comments

  1. February 14, 2014 @ 8:57 am Ed Chan

    As usual Michael. A sensible and measured assessment of our property market based on facts, economics, research and good old sensible common sense. That is why Michael Yardney is the first person I listen to when there is a lot of “noise” (which creates confusio) in the market place.

    Reply

    • February 14, 2014 @ 9:09 am Michael Yardney

      Thanks for the kind words Ed
      We’ve both been around long enough to have seen all these media hunters come and go

      Reply

  2. February 14, 2014 @ 9:08 am Tina S

    Thanks for this Michael.
    It’s amazing the amount of press Harry Dent has received, considering how wrong his predictions have been in the past.
    It seems there’s a group of people out there who are mad keen to see property prices collapse so they can get into the market. They seem to feel property owners are rich and greedy, not realising that we have to work hard, scrimp and save and go without to accumulate our first deposit.
    It was hard then, just like it is hard now

    Reply

    • February 14, 2014 @ 9:12 am Michael Yardney

      You are right Tina
      It’s always been difficult for first home buyers. It was hard when I started, it’s difficult today and it won’t get any easier tomorrow.
      There is affordable housing around – there always has been – but many First Home Buyers don’t want to start with a Kia or Hyundi – they want to start with a brand new Honda or Subaru.

      But as I said, expensive housing doesn’t create a bubble

      Reply

  3. February 14, 2014 @ 11:06 am Stephen

    Great to see your contribution.

    Thank you Michael,

    I am in total I support of everything you have said.

    Nay sayers are in all walks of life and they are never more noticeable than when they speculate on what various investment markets will do.

    Our market will have its cycles- and as a mortgage broker involved in the investment market since 2000 I am comfortable in the market that I have invested in. My energy is in a long term outcome, I buy when I can, I hold for as long as I can afford it, and I sell when I need to or want to, after 20 years of owning property in Australia, I am comfortable that there are more than enough underlying strengths to allow me and my clients to keep building our portfolios.

    Thank you for your reasoning, I have sent your article today to clients that panicked last week when they saw the Dent report.

    Reply

    • February 14, 2014 @ 11:10 am Michael Yardney

      Thanks Stephen
      like you, I’ve spoken to many people who were concerned when the media gave Mr Dent more credit than he was due

      Reply

  4. February 14, 2014 @ 12:58 pm Judith Stace

    What annoys me about these “experts” is that sometimes you tend to doubt yourself just a little. I remember when Robert Kiyosake said a similar thing years ago. Our neighbours sold up every investment property and I thought about it but….this is how I analised it..if properties are to drop by 50% that means on new builds either the land and/or the construction costs would have to drop dramatically to go with the flow. Construction prices won’t drop so that leaves the land content. If a block of land is $250,000 and the build is $300,000..ie: $550,000 finished and then the “bubble bursts” according to Dent your house is worth $275,000. As stated construction costs won’t drop so the land content would have to drop to $25,000. SERIOUSLY is that going to happening in a country who has + pop growth? It would have to be a major depression or wartime I think.

    Reply

    • February 14, 2014 @ 1:41 pm Michael Yardney

      Judith
      Thanks for your comment. Your sums make sense and show the fallacy of the argument.

      Reply

  5. February 14, 2014 @ 4:08 pm Elizabeth

    Thank you Michael . As always you give the facts , it is so easy to get confused by these so called “experts” ……. but I remembered Harry Dents last visit where it was all doom n gloom which I might add didn’t come to fruition , so I just ignored this visit ………..
    I am more than happy with my investments and will continue to build on them.
    Thank you again for your commentary I always enjoy reading them.

    Reply

  6. February 14, 2014 @ 4:42 pm Billy

    Haha I’m not going to loose any sleep over this ‘expert’ Harry Dent. He has cried wolf far too many times and interestingly enough, he predicted the dow jones would rise to 40,000 points, and this was only a few years before the GFC! Adding to what others have said here, as long as yields, construction costs and land costs remain sustainable whilst there is relatively low unemployment and low interest rates, HOW could the prices really drop that much?

    Reply

  7. February 14, 2014 @ 7:14 pm Graham

    Hi Michael

    Can you ask Mr Dent that if I sell my property now and no bubble in 3 months would he Mr Dent reimburse me the money loss?

    Graham

    Reply

    • February 14, 2014 @ 7:50 pm Michael Yardney

      Graham

      he made $100 bet on radio that he was write – I would have taken him up on it if I could

      Reply

  8. February 20, 2014 @ 8:51 am Geoff

    It’s not only this non expert who has no idea what drives our property market…try Steve Keen and Scott Pape who both made fearless predictions about our drop in values back in ’08, ’09. Keen sold his Aussie properties because he knew the crash was coming !

    Reply

  9. February 24, 2014 @ 8:57 am Mick M

    Hi, thanks Michael.
    Appreciate your fantastic and level headed (insert realistic) appreciation of the property markets.

    Its easy to realise the economic drivers (including supply/demand) that underpin prices to which you and the readers above point out.

    Nonetheless, these wild predictions and extraneous ‘noise’ that we hear regularly just emphasise that it is down to us individuals to exercise due diligence + do our homework on the real facts. I feel sorry for those that are stifled by such wild predictions, which of course, only serve to bring publicity to Dent and in turn generate his profits.

    All the best

    Reply

  10. March 10, 2014 @ 6:01 pm John

    Dear Michael,
    Both Harry Dent and you give plausible reasons for each viewpoint. It would appear that both of you have your interests to protect. Accordingly, I believe that the opinion of someone, who is not involved in property (as you are) and someone who is not selling economic books (as Harry Dent is ) would have more weight on the issue of future property prices and whether there will or will not be a property crash.
    Kind Regards
    John

    Reply

    • March 10, 2014 @ 8:02 pm Michael Yardney

      I understand where you’re coming from John., but why would someone NOT involved in property know about these things?

      Reply

      • March 11, 2014 @ 9:41 pm John

        Dear Michael
        Good point. However, with all due respect to you, the same could be said the other way ie Harry Dent’s key expertise (from what I have read) is demographics. Accordingly, I believe that Harry Dent would be best qualified to comment on demographics and how that may impact on components of the economy, with property being only one such component. Please understand that I am not taking sides. Unfortunately, we all understand things from our own point of view which is influenced from our background, biases, ethnicity, level of wealth, marital status etc. What we really need is the opinion of someone without any interests at all.
        Kind regards
        John

        Reply

    • March 29, 2014 @ 1:51 pm Adam

      Hi Michael,
      if you see the headlines from SMH today 29/03/14, it is very clear that a housing crash is coming

      “More than 2500 auctions over next three weeks”
      “Some vendors may have left their run a bit late”
      http://smh.domain.com.au/real-estate-news/more-than-2500-auctions-over-next-three-weeks-20140328-35nnn.html

      in the area that had the most buyers interest in inner Sydney
      another comment from a real estate agent
      ‘‘I haven’t seen this many houses for sale for about $1.5 million in Surry Hills for a long time,’’ LJ Hooker Inner City agent Brigitte Blackman said.
      ‘‘But there are less bidders at auction, the heat’s not there.”

      “the heat’s not there”……. what is that telling you
      all the investors who are smart and can see it coming, are selling up while they can

      the perfect housing bubble situation..
      from investopedia..
      “At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.”

      another general rule of any information … if the media is reporting it, its already too late

      About time the property market corrects itself
      Regards
      Adam

      Reply

      • March 29, 2014 @ 6:07 pm Michael Yardney

        Thanks Adam

        It’s not very clear that a housing crash is on the cards. What is clear is the Sydney market is well into this current cycle

        Reply


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