Rich Dad author Robert Kiyosaki warns investors to avoid real estate – is he right?

Donald Trump and Robert Kiyosaki

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 Dadseries, has sold millions of books and is a regular speaker on wealth creation.

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.”

In 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 asset, 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 Australia 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.

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!

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.

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 cyclical correction – we need one or more of the following four things.

1. A major depression (not just a recession). Nobody (other than maybe Harry Dent and Robert Kiyosaki) 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.

However, house price growth peaked mid year and slowed over the second 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

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 Australian dollar is likely to encourage overseas investors to keep ploughing their money into new and off-the-plan 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.

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. As Donald Trump says: “Nothing is easy… but who wants nothing.”

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