‘Rich Dad’ author Robert Kiyosaki warns investors to avoid real estate. Is he right?

Robert Kiyosaki has been wandering around the country telling anyone who’ll listen to him that the Australian property bubble is about to burst.

Now Kiyosaki comes to Australia every 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.

Who is this guy?

In case you’ve been living under a rock, Robert Kiyosaki is the author of the Rich Dad, Poor Dad series, has sold millions of books and is a regular speaker on wealth creation.Rich Dad, Poor Dad

In my early days I learned a lot from his books, but over the years I’ve realised how many of his principles do not apply to Australia and in particular to Australian property investment.

I’ve also watched as many of his predictions of the “sky falling” or a major crash occurring have been patently wrong or were so many years “ahead of their time” that they have been dangerous for investors.

Interestingly in 2012 he filed for bankruptcy in the United States, and while there is nothing wrong with this – many successful property investors, business people and entrepreneurs have gone through very difficult times and come out even stronger at the other end – having followed Kiyosaki’s predictions since the 1990s I’ve found he tends to speak doom and gloom because it fills up the seminars and sells lots of books.

I’ve also found his theories, which may be relevant to the USA, are often not appropriate to Australian property markets.

For example Kiyosaki is famous for saying that “your home is not an asset.

Your home is not an assetIn my opinion he’s patently wrong.

For most Australians who buy a home and pay it off over their lifetime, their home is the largest and sometimes only asset.

Sure it’s not an income producing assets, but it’s an asset that can be used to produce income by borrowing against it and buying investment properties.

Another book tour

Like many overseas authors Kiyosaki comes to Australian when he has a new book he wants to promote, creates havoc and then goes back home.

This time it’s his book Rich Dad’s Prophecy which predicts a global crisis caused by a United States currency crash in 2016.

It’s not uncommon for overseas authors to do this. Remember earlier this year US demographer Harry Dent predicted the bubble will burst and wipe out up to half the value of property by mid 2014!

What did Kiyosaki actually say?

Kiyosaki warned not to touch Australian real estate because foreign investment is over-inflating the market and that Australia’s real estate market is a bubble that will burst.

Well he is right that foreign investment has overinflated certain segments of our property markets  – in particular inner CBD and off the plan properties; but he is wrong in warning that we are in a “bubble” and the sky is about to fall!

So what is a property bubble?

Investopedia defines it as:

“A run-up in housing prices fuelled 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.Property bubble

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.

So are we in a bubble?

The simple answer is NO and property values are not about to collapse!Are we in a bubble

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

The RBA and chief economists at all of Australia’s major banks, who have proved more accurate at predicting the swings and roundabouts of the Australian economy, believe our property market is not in bubble territory.

How does this property cycle compare?

Despite what some in the media may have you think, property price growth has been relatively modest this time round, and has been mainly concentrated in Melbourne and Sydney.

Property values are not going to collapse

Looking at the following graph from CoreLogic you’ll see the previous property cycle ran from the beginning of 2001 until October 2004. Over that 46 month period, home values rose by a total of 68.1% across the combined capital cities.

This is a monthly rate of value growth over that period of almost 1.5%.

The current rise in capital city home values commenced in June 2012 and up until November 2014 values had been trending higher for 30 months and over this period combined capital city home values have increased by 19.6% or a monthly rate of growth of 0.7%.

However, it’s important to consider that the current growth phase occurred off the back of values having fallen by -7.4% between October 2010 and May 2012.

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 maybe Harry Dent and Robert Kiyosaki’s) is suggesting this will occur.
  2. Massive unemployment and people not able to keep paying their mortgages. While unemployment may edge up next year “massive” unemployment is unlikely.
  3. Exceedingly high interest rates so that homeowners 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 next year?

The Australian property markets have enjoyed a positive 2014 buoyed by strong population growth, historically low interest rates, a voracious appetite for capital growth by property investors and the desire by overseas investors to place their money in Australia’s large capital cities.What is likely to happen to property values next year

However, house price growth peaked mid year and slowed over the 2nd half of 2014.

House price growth is likely to moderate in 2015 due to the soft outlook for economic growth in Australia, which will cause rising unemployment, ongoing job security concerns, lower consumer confidence and sluggish household income growth.

The positive factors for housing markets include:

While growth will slow there are still plenty of factors supporting our property markets:

  • Strong population growth, particularly in Melbourne and Sydney
  • The wealth effect with existing homeowners (particularly in Melbourne and Sydney) feeling comfortable as the value of their homes have risen significantly over the last few years.
  • Historically low interest rates and the likelihood of another fall in official interest rates
  • 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. Think about it…the banks won’t lend us money if we can’t afford to repay our loans.
  • Overseas investors are still looking for a safe haven for their money and will keep investing in Australian property.

And the low Australia dollar is likely to encourage overseas investors to keep ploughing their money into new and off the plane high-rise apartments in our major capital cities.

This will continue at a time when we already have an oversupply of this type of property and will push the prices of inner CBD properties significantly above their intrinsic value.

In conclusion:

Of course there is not one property market and as always some markets will perform better than others in 2015.

But on the whole a mixture of low interest rates, strong population growth, relative job stability, affordability and slowly increasing confidence will have more people getting involved in property next year.Nothing is easy… but who wants nothing

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 homebuyers 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”.

What does all this mean for you?

Of course…if you want to grow your property portfolio in a more difficult environment next year you’ll need to buy the right type of property.

One that has a level of scarcity, meaning they will be in continuous strong demand by owner occupiers (to keep pushing up the value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle (that would be now in many states) and for the right price.

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To become a successful investor you will need to surround yourself with a team of independent and unbiased professional advisors (not sales people) – a team of people who are known, proven and trusted, so it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team at Metropole have no properties to sell, so their advice is independent and unbiased.

If you’re looking for independent property investment advice to help you become financially independent, including how to get he banks to say yes more often to you, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties on the market to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

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About

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


'‘Rich Dad’ author Robert Kiyosaki warns investors to avoid real estate. Is he right?' have 15 comments

  1. Avatar for Property Update

    December 19, 2014 George

    To some extent I agree with Michael. However, it all doesn’t bother me because I invest in lateral markets not cyclical markets.
    I buy mainly for strong positive cash flow and never where the next property hotspot may be. Granted the capital appreciation is where the real wealth is made, but who cares how much appreciation there is. I live off of the income not keep refinancing. If I keep refinancing to fund my lifestyle then when a property crash does happen I would be in trouble. My way of investing isn’t tax efficient but very safe and so I just find all these doom and gloomers very amusing. I invest in London UK full time. Sorry to go off at a tangent.

    Reply

  2. Avatar for Property Update

    December 14, 2014 mark

    Also above someone said increase is immigration had no impact on our market!! Are you serious??? If they cannot afford to buy a house straight away, they have to RENT a property which benefits ME, YOU and all other property investors…

    Reply

  3. Avatar for Property Update

    December 14, 2014 mark

    Property investment for me is a long term thing. I remembered when i was 17 years old and all the “older” tradesman i use to work with always said to me “i wish i invested in property years ago”. So i took their advise when i had enough money for a deposit and i bought my first home in 2009 in the GFC. My friends said to me property was still too over-priced and not to buy!! Thank god i didnt listen to the negative criticism. 5 years on and i have 3 investment properties with a large value of equity, and if property prices dropped now, I know that there is no chance they will fall anywhere near the “original purchase price” i payed for them years ago! They have not cost me a dollar to keep as rental income has covered the “interest” owed to the bank.

    If you select the right property, in the right area with good infrastructure, transport in a high demand area or development opportunities, your investment property will outperform the rest of the field!

    Michael is spot on in this article. While pessimist speculate about buying property, “true investors” get the job done by doing the research and the hard yards and accumulate property in the mean time.

    Reply

  4. Avatar for Property Update

    December 12, 2014 TR

    C’mon Michael, Of course you are going to say that… your vested interest is in the hope that people still buy property and hopefully use your services… your business will suffer if you agree with Kiyosaki – you should disclose this, as your comments are not truly ‘independent’.
    Having said that, there is a fair bit of value in what you say and do. For me as a private investor over the last 15 years, 6 properties, average wage.. the key has been: have a plan/goal, asset selection, time in the market….
    I’m not worried about what the property market does in 2015, I want to know what it will be like in 2025!
    Good luck!

    Reply

    • Avatar for Property Update

      December 13, 2014 Michael Yardney

      TR
      You are right – yes I do have a vested interest – I own a very, very significant property portfolio. I’m not a theorist – I’m a doer.
      Sound like you are too – well done!

      Reply

  5. Avatar for Property Update

    December 12, 2014 Undisclosed

    I do not agree to some parts of your document. Mind you i work for an industry that follows property market religiously and pur company holds over 60% of the lmi portfolio. Anyways for a property market to collapse you do not need a mass unemployment. That NEVER happens in any economy, all you need is a perception of mass unemployment for consumer to loose confidence. Anything over 8-9% unemployment would be enough to create that. Also when you talk about growth as an overall in melbourne and sydney its very very deceptive. The growth is highly spread in different areas and looking at a weighted average growth on an overall market is not only incompetent but also wrong. Thirdly increase in immigration has literally ZERO effect on the short term (5 -10 yrs) property market. I have done the hypothesis testing on this and you should too. The reason i found is the immigrant is neither mature nor has the consumer power to own the house plus the banks look at people with less than 2 years job history unfavourable. Overseaa investor yes would drive the market but with USD falling and chineese own real estate in over supply i highly doubt Australia is a place to be for real estate. :)

    Reply

  6. Avatar for Property Update

    December 12, 2014 Evgeny Sorokin

    MICHAEL YARDNEY, you are right, Kiyosaki tends to speak doom and gloom. However, he didn’t file for bankruptcy because he was in financial trouble. You clearly didn’t thoroughly study his books. He did this because this would save him something like $18,000,000.

    Also, if you refer specifically to residential property, then say so. Don’t just say “property”.

    And if you were an expert you claim to be, you would know that the main reason why residential property is so overvalued is mum-and-dad investors who buy “investment properties” that give them net yields of as low as 3%. Many of these amateurs will never make any profit. They will brag to friends and colleagues how massive their tax returns are because of negative gearing, and 10 years later when they sell the property for $100K more than they paid for it, they will brag about the $100K capital appreciation, and not even realise that they lost more money in that 10-year period than the after-tax capital gains they made.
    How pathetic!

    Reply

    • Avatar for Property Update

      December 12, 2014 Michael Yardney

      Your’e right – he didn’t personally Go bankrupt – he just avoided paying his creditors to the tune of $18,000,000. Now that’s INTERESTING isn’t it?

      And yes I’m basically talking about residential property – the commercial property market is very different

      Reply

      • Avatar for Property Update

        December 12, 2014 peter collins

        Thankyou for your excellently clear thoughts.
        What are your thoughts on industrial property (not offices) , size 200 m2 to 500m2 in (perth) suburbs
        say within 8 km of centre of city ?
        Thankyou in anticipation , peter.

        Reply

        • Avatar for Property Update

          December 12, 2014 Michael Yardney

          With Australia becoming less of a manufacturing country I see less growth in industrial than other commercial properties.
          Further when interest rates eventually do rise the value of commercial properties, which are yield driven, will fall

          Reply

  7. Avatar for Property Update

    December 12, 2014 jenni

    I read your article with a sign of relief. The way you explained the process in detail rang true for me. Thanks Michael. This was a well written article.

    Reply

  8. Avatar for Property Update

    December 12, 2014 Peter

    How can property NOT be an asset, unless you have your own definition of asset. I would suggest that Kiyosaki looks up the definition of an asset in a good dictionary. Personally, I went “off” Kiyosaki and his books because of this. And, yes, the property market in Australia is quite different to the US. Obviously, Michael Yardney is much more credible in Australia than Kiyosaki or any other overseas base guru.

    Reply

  9. Avatar for Property Update

    December 12, 2014 Hari Yellina

    Michael, I have been following you for at least 10 years. You have bben right about the property all along. Great to see your updates every day.

    Reply

    • Avatar for Property Update

      December 12, 2014 Michael Yardney

      Thanks Harry – Of ocurse I’m not always right – but it’s easier to be right on the direction of property when you take a long term “macro” view

      Reply


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