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Why Harry Dent picked Brisbane as a Bubbletown

US economist Harry Dent has described the Brisbane property market as a bubble about to burst

So what is a speculative bubble?

“A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values.

This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.”

Here’s an example of what a bubble might look like:

Here’s an example of what a bubble might look like

The above is a chart of the earnings ratios of an Indian company (INFY) during the tech stock bubble.

Being a graph of earnings ratios, all other things being equal (i.e. unless the company truly did have phenomenal growth prospects which then reversed) you might expect the trend to be fairly flat.

Dwelling prices

This is a graph of Brisbane dwelling prices which is not inflation-adjusted. In other words, over time you would expect it move up moderately as household incomes increase.

Brisbane is the world’s biggest bubble:

Modern-day Nostradamus Harry Dent says that Brisbane is biggest bubble in world real estate:

“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%!”

Now, there are plenty of people out there who have stated that Australia is in a property bubble.

But I couldn’t for the life of me think why Dent picked out Brisbane – the cheapest capital city on the Australian mainland in which to buy a house – so I didn’t pass comment at first. To me a bubble implies unsustainability.

Here is what a genuine expert on the Brisbane property market, Michael Matusik, had to say:

“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.”

So while you might argue that property in Brisbane is expensive, it is not easy to argue that today’s prices are not sustainable.

So why did Dent pick out Brisbane as the biggest bubble in the world of property?

Here are 6 of the reasons why:

1. Every man and his dog predicted an Australian property bubble!

There is a huge market for reading about an Australian property bubble. Thousands talk about a bubble in the hope that prices crash so that they can buy prime-location real estate themselves (which is the very desire and dynamic that made prices high in the first place, right?)

Jumping on the Australian property bubble bandwagon is not going to generate Dent headlines and sell him his precious books. He needed to get more specific, and…

2. People sure love specific predictions!

From the ancient Mayans to Mystic Meg, humans love specific predictions! As people we take great comfort in having specific information that we can rely on or turn to, even if deep down we know that the information cannot be any more accurate than a tealeaf reading or a tarot card.

Back when I used to work in a real job in a factory that actually made useful stuff out of wood (as opposed to financial services paper-shuffling), one of my fellow warehousemen, a bloke called John if memory serves, based his entire financial future upon the predication – his absolute certainty – that one day he would win Britain’s National Lottery.

John’s theory was that if he played often enough and for long enough he would be sure to win eventually. It hasn’t happened yet, but as the ‘Voice of the Balls’ (or was it just the ‘Voice of Balls’?) used to say…”It COULD be YOU!”

Investors would draw blood for John’s level of certainty in their exploits. It’s known as the search for the Holy Grail: the information or trading system that will make them an infallible investor. It doesn’t exist, but that won’t stop people searching for it. Still, that’s OK because…

3. It doesn’t matter if you’re wrong!

Read Dent’s past books they are stocked full of pretentious, third person “we foresee the next boom period running from January 2037 to March 2039” type predictions and the overwhelming majority of them are just plain wrong.

It would be tempting to say that Dent’s infamous ‘Dow 40,000’ prediction that the Dow Jones would reach 40,000 points by the end of the last decade was the crappiest prediction in the entire history of crap predictions, but even that howler wouldn’t get the gig. His NASDAQ prediction was even worse!

This hasn’t stemmed the book sales though. People love to read about predictions, but Dent has a problem in that…

4. Sydney was a spectacular miss!

Dent’s last great Australian property prediction is all set to be another huge clanger. Sydney property prices to drop by 55% by 2014” – well, the clock is running down on that baby and it looks like RP Data is set to record yet another increase in prices this month. Dent desperately needed another target, and…

5. Brisbane prices have been correcting!

As the chart above shows, Brisbane has corrected a little. Depending on your preferred data source, Brisbane house prices have reportedly fallen by around 12% from their peak. Dent will cling to that as a ‘head start’ on his prediction if prices do fall further. And if he’s wrong, well, no-one will remember anyway if history is anything to go by.

So, Dent’s approach is to generate a headline by hitting people where it hurts, in their own backyard by…

6. Making it personal!

If you want to really hurt someone, you don’t blithely make flippant or derisory comments in their general direction, you deliver them a specific insult that is targeted directly in their face and preys upon their worst fears.

And has it worked? You betcha! Dent got his press coverage and will sell thousands more books as a result. Voila! A master craftsman BS merchant in action*.

*Harry – if Brisbane’s house prices fall by 85% I promise I will take it all back.

The INFY chart is sourced from the Fundoo Professor Blog

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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Why Harry Dent picked Brisbane as a Bubbletown' have 14 comments

  1. Avatar for Property Update

    January 10, 2013 @ 9:28 am tom

    I can’t stand deflationists, they come pouring out of the wood works at the bottom of a cycle and call out other economists with their puffed up chests. Then they hide in the shadows with the markets start roaring due to QE and the like.

    You just have to be patient with Australia, the Greek government cant print money and neither can the Australian citizens, it’ll hit the wall sooner or later. A ponzi scheme always does.

    Reply

  2. Avatar for Property Update

    October 31, 2013 @ 11:20 am Burton

    Peter I just stumbled across the article you wrote and it is misleading. ( I am in my mid 30’s and have owned investment properties, bought and sold a few in that time, since 1999). Harry S. Dent said Australian property prices are likely to fall by 50% -55%. I quote from the Foreword of his book The Great Crash Ahead which was published in 2011, “We see Australia’s… housing markets declining… by 50% to 55% between 2012 and 2014. But Australia should weather the coming storm better than any other developed country and should lead the boom to follow as well.”

    We have had a decline in property prices in South East Queensland. I owned 3 investment properties in 2011. I thought the crash would hit in 2012 as well and started offloading my properties in 2011. (I had owned these properties for 8 to 10 years) The first property in Dayboro which would have sold (conservatively) for around $580k – $600K in 2009, I got $485K for it. The second property in Currimundi I would have got $330k for it in 2009, I got $267,500 for it. The last property in Albany Creek I would have got $440k for it in 2009, I got $421,150 for it in September 2013. (Now I’m sitting on a load of cash and my wife and I are only paying $340 per week rent). NONE of these properties have gained in value since, even with ridiculously low interest rates and people in the RE industry talking up prices . It is in YOUR best interest as a property investment spruiker to talk up the market, but why do only 30% of RE agents in Australia own any property yet they are always telling us it’s a great time to buy? Why have RE Principals I know personally who are aged in their 40’s sold all their investment properties and are sitting on cash if property is so good right now? Why have they told me in confidence that their own gut feeling is that property prices will be flat at best as long as interest rates don’t go up? Harry S. Dent is NOT peddling fear. He is telling it like it is. Our economy is in an artificial state of supposed prosperity. The Baby Boomers aren’t buying houses now like they were, Gen X are mostly debt slaves paying off large mortgages, and many of Gen Y are priced out of the market.

    Talking up the market keeps the money coming in for guys like you, but the music will stop some time in the near future when Government has to stop living on borrowed money and interest rates inevitably rise to realistic levels. The market needs to be reset. For most people you now need 2 incomes to support a family and pay a mortgage. Household incomes compared to mortgage payments statistics are misleading. Most households have 2 incomes instead of just the 1 to support a mortgage, let alone an investment loan(s) as well. It is way different to when I started buying property in 1999… In my opinion, property in Brisbane is overvalued by at least 30%, when compared to average incomes and rental returns. I am worried many will get burnt when all the worldwide artificial stimulus ends and unemployment rises… Mum and Dad “investors” who are getting in to the market now will suffer, while cashed up vultures will swoop in and profit from their misfortune…

    Reply

    • Avatar for Property Update

      April 26, 2015 @ 12:39 pm James Lepard

      Australia is not special. Rich foreigners, mainly Chinese but others too are being allowed to purchase property in Australian cities, and this is keeping the market inflated. The average Australian in his 20’s and 30’s looking to buy a house and start a family cannot afford half a million dollars, and even the ones that pour their savings into a deposit and take out a loan are taking a huge risk.

      I simply don’t understand you “deflation haters” who think it’s a good thing for the younger generations to have to pay $500,000 for something 20-30 years old that you bought for a fraction of that, and spend their lives paying back debt all just so you can retire and look for a new scam to invest in. Shame on you.

      As for you investment property rent gleaners, you are a big part of the reason I am priced out of life. I am 30 years old, working a honest job, 60 hours a week, I am not particularly stupid or intelligent and I really don’t see the predatory, irrational, reactionary survival of the highest bidder system as something that will bring us a happy future, and once enough of the populace feels disenfranchised, we will all have to eat everything you people have made.

      Reply

      • Avatar for Property Update

        April 26, 2015 @ 12:49 pm Michael Yardney

        I’m sorry you feel that way James

        Ask your parents or grandparents if buying their first home was cheap or easy – It wasn’t then and it isn’t now – very little has changed in that regard

        Reply

        • Avatar for Property Update

          May 10, 2015 @ 2:38 pm James Lepard

          Thanks for your reply Michael,

          According to the Queensland government, the recorded average weekly income in 2001 for a resident of that state was $796.50 AUD whilst in 2014 it was marked down at $1,430.40 AUD.
          http://www.qgso.qld.gov.au/products/tables/average-weekly-earnings-qld-aus/index.php

          So with the stated above, we can say that the weekly income doubled in that time. Property prices did not, they increased considerably more and that trend seems to be continuing.

          Whilst you’re right, it was never cheap or easy, for the millennial generation it is becoming next to impossible, they will be a renter generation if mine isn’t already.

          I spoke to a friend recently and he told me of some cheap houses available in his area, priced around the $450,000 mark. When I told him that wasn’t cheap and that I’m looking at the $200-300 range, he told me to just save up. I then asked him how much he paid for his place in 2001, and he responded with $129,000. I couldn’t help feeling a little insulted, and sad that I wasn’t born 20 years earlier.

          The idea of working myself into a position where I may someday live of the young persons rent just doesn’t appeal to me.

          Good luck to you all who read this, no hard feelings intended.

          Reply

  3. Avatar for Property Update

    October 31, 2013 @ 4:56 pm Pete Wargent

    Hi Burton, no benefit to me talking up the Brisbane market – never bought a property there in my life – in fact, I didn’t even suggest doing so. In real terms prices are quite some way below their peak in Brisbane, and it’s also the case that some properties will obviously do better/worse than others. The Forbes 70-85% crash quote is referenced here:

    http://matusikmissive.com.au/2012/10/31/dent/

    Of course there always might be a correction, which is why property should be a long-term investment. Nobody can predict the immediate future, including Dent, which is why his prediction will once again be miles out.

    In fact, prices are now rising in Brisbane, albeit moderately (+2% q/q).

    Reply

  4. Avatar for Property Update

    February 5, 2014 @ 5:04 pm Mark

    Will have to agree with Burton 100% here. Sitting on $80K negative equity on one of my investment properties currently. There’s a lot of talking up and cover-up’s going on currently to draw in the mum & dad investors to property. Then there’s the “half truths” that’s been brain washed into the society like what Pete is re-agitating above. Ie – “having a correction” “property is a long-term investment”

    Then there’s “property doubles every 10 years” “Negative gearing makes you wealthy” etc.. etc..

    Reply

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      February 5, 2014 @ 5:11 pm Pete Wargent

      I’ve never said that “property doubles every 10 years” and I note that median prices are rising in Brisbane. Of course some people don’t do very well in property over the short term, that’s always true.

      One question – if you think that: “Then there’s the “half truths” that’s been brain washed into the society like what Pete is re-agitating above” why do you invest in properties?

      Reply

  5. Avatar for Property Update

    February 9, 2014 @ 11:12 am Allen

    I can tell you first hand having lived through the California real estate crash in 2008 that led to the GFC. Dent tried to warn people back then but nobody wanted to listen even myself. Dent was right then and he’s right now. I now live in Australia on the Gold Coast but I am terrified to buy property at this point. I think I’ll wait till the bubble burst then pick up a great deal.

    Reply

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      February 11, 2014 @ 11:43 pm jade

      You may have to wait for a while to get a “great deal” Allen……..like forever!!

      Reply

  6. Avatar for Property Update

    April 2, 2014 @ 1:35 pm manny

    I see Australia is special, we are different to the rest of the world, we are better even though debt to gdp is near all time highs. Alot of hopeful property lovers in this country with vested interests in property. Cant wait to see you spruikers eat your words one day soon.

    Reply

  7. Avatar for Property Update

    April 2, 2014 @ 3:57 pm Pete Wargent

    Maybe. Sydney prices are up by by 22% since I wrote this. I see Dent has changed his prediction to 27% crash now.

    Reply


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