Australia’s doom prophecy déjà vu

15th Mar 2018By: John McGrath

Well, he’s back. Harry Dent – the controversial US economic forecaster has returned to Australia to promote his latest book and sell tickets to seminars being held around the country. And what are his predictions for our property market? Pretty much the same as they were in 2014. Oh, and 2011.

Dent says Australian property is “way overvalued” and we’re in the midst of a bubble that will inevitably burst. He describes real estate as our economic “vulnerability” with price losses of 20-50% expected during what he predicts will be a second GFC that will be worse than the first. Yep, it’s doomsday stuff all right.

In an interview on Channel 9 last week, he agreed that his 2011 and 2014 predictions of a price crash here were wrong. He says while most of his economic predictions have come true, we’re “the exception” and it’s largely due to our strong immigration.

“Australia is one of the few countries in the developed world that has very strong demographic trends now and ahead,” he said during the TV interview. “Your demographics is your savings grace and that is coming from very high quantity and quality of immigration. You’ll weather (the next GFC) better than most countries but I think real estate is your vulnerability.

He goes on to say: “I predicted almost every major bubble and major turn of events in the world except for this one. (Australia) really has been the exception but a bubble can only go so far, you are way more overvalued now than you were back then, more than twice what the US is and most European countries and this global crisis, so it may just be 20%, I say 50% max, that’s the range.”

Now I’ve been in real estate for 35 years and I’m yet to see any doomsday predictions about our property market from overseas commentators come true.

Strong population growth is not the only reason we survived the GFC relatively unscathed and I believe it’s certainly not the only reason our property market will never crash like the US. And herein lies the problem with Dent. You can’t bring an American mindset into any analysis of the Australian property market.

I can understand why Dent would look at Sydney, in particular, and think it’s overvalued. That’s how it might look on paper to an analyst who doesn’t understand how things work here. He fails to take into account all the unique factors that have kept our property prices growing while also protecting our market from collapse.

One of the most important factors is the high level of prudential oversight in our banking system. As we all know, it’s harder to get a loan for investment these days – especially on interest only terms; and that’s because APRA has identified a potential threat from high levels of investment activity and applied measures to deal with it.

We have stringent approval procedures on every new loan, such as assessing a person’s ability to make their repayments when interest rates are at the long term average of 7%-7.5% – not at today’s 4-5%.

Among other things, Dent looks at demographic trends to determine his predictions, so let’s highlight one of the most unique trends in Australia that is significant in keeping a floor under prices in all capital cities.

Australia may be ‘a land of sweeping plains’ but we have nowhere near the population spread across our country that the US does. In fact, more than two-thirds of Australians (about 15 million people) live in a capital city and we only have eight of them.

On top of this, 8 in 10 of our migrants also choose to live in a capital city, primarily Sydney and Melbourne.

When you’re having a growing population that is very concentrated around a small group of cities – and two in particular, you’re going to have much greater stability in home values no matter how high prices go.

Additionally, in major growing cities like Sydney where urban sprawl has gone about as far as it can, we now have a chronic undersupply of new housing that is also serving as a strong foundation for ongoing growth.

On top of this, we have low unemployment, a strong and resilient economy, low interest rates, a tax system that rewards property investment and a growing market of international buyers. All of this will contribute to the ongoing growth and stability not only of Sydney and Melbourne but all of our major city markets.

Dent argues that it takes 10 times the typical income to buy a typical house in Sydney and Melbourne, which he says is unsustainable. Well, if it’s so unsustainable, why are we currently seeing healthy auction clearance rates of 60%-70% in Sydney and Melbourne, even though both cities are at a price peak following a five year boom?

While I don’t question that there is an affordability challenge for young buyers, Dent also fails to take into account the ingenuity of Australians, not to mention our long-embedded culture and passion for property ownership.  Australians seem to find a way when they want to buy a home.

Look at the emergence of ‘rentvesting’ and the bank of mum and dad among first home buyers. Look at how many families have adapted to apartment living over the traditional quarter acre block. Look at the number of people swapping Sydney for Melbourne or Brisbane to achieve better affordability. And how about the way we’ve embraced property investment through self-managed super? Prices keep going up but we still find a way.

In today’s high tech world, with so much information available and so many people expressing opinions, it can be hard for the ordinary home buyer or investor to figure out what’s worth listening to.

My advice is to cut through the noise and take a simple lesson from history.

Good quality Australian real estate, held over the long term, is one of the safest and most reliable asset classes you’ll find anywhere in the world. Regardless of any sort of local or global economic downturn, we have decades of evidence proving that despite recessions (like in the 1990s), or 17% interest rates (like in the 1980s), or major economic events (like the GFC), Australian property will continue to grow over the long term.

Keep in mind our market’s outstanding history next time an overseas ‘expert’ comes to town!