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 a 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 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.

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.

Lots 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!

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 predictions 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 two 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 cyclical correction – we need one or more of the following four things:

• A major depression (not just a recession.) Nobody (other than Dent) is suggesting this will occur.
• Massive unemployment and people not able to keep paying their mortgages. Unlikely.
• 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.
• 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-Adelaide Bank 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 said 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 four 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 littles” 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, 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 one-day training sessions in five capital cities in March and April.

Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.