Property Boom, or Doom and Gloom? Understand property bubbles and crashes so you can stop being freaked out by the media

Finance & Fury Podcast

This week’s Say ‘What’ Wednesday is from my friend Adam. We were talking on the weekend about Harry Dent’s recent visit

1. He predicts a property crash - There is ALWAYS another financial crash coming!
2. He claims that Australian property is set for a 50% crash - Or correction?
3. Interestingly, Dent made similar prediction in 2011, 2012, and 2014 as did The Economistand Demographia.

History: Lets go back in time

1. 2014 - Dent came to Australia warning the China bubble would bursts in mid-2014 and Sydney house prices could collapse by up to 55%.
   • What happened? Houses and units went up over 80% since then
2. 2012- Dent was quoted in Forbes as saying: “The greatest housing bubble in developed-country cities starts with Brisbane, Australia …”.
   • What happened? Prices went up average 23%

End of the world

1. Just like those that predicted the end of the world – Mayan calendars – just read the tea leaves wrong.
2. But Harry has doubled down in his conviction his timing was premature
3. Forecast is correct because he has no doubt that we are in a bubble.

Wait... bubbles are different to a guaranteed crash!

1. I agree we are a bit of a bubble – when compared to the rest of the world
2. Bubbles “can” crash isn’t the same as bubbles “will” crash
3. There’s two options; either the price growth can crash, or the price growth can slow to a snail’s pace, or have slow and steady declines (a small correction)

Reasons

1. Look at the areas with ‘bubbles’
   1. Sydney, Auckland, Vancouver, NYC – High immigration + low supply
2. What are the signs of a Bubbles?

• Sydney price-to-income ratios are the second highest in the world—above London and New York—but hey, Sydney is a great place to live.
  • High incomes, employment, and family members of those moving here
• Supply is constrained by zoning laws, two national parks, a mountain range, and an ocean. Yet demand continues to grow, so prices tend to rise.

Where Dent is confused – Australia is different to the US

1 - Our regulators are prepared (too much so?)

• APRA introduced several measures aimed at reducing risks in the mortgage market – investors and interest-only lending have been key targets.
• The number of investors in interest-only loans fell sharply as a result, and experts see a major recovery as unlikely in the near term. This is a long-term strategy.
• UBS economists argue the move “suggests a more rapid tightening of lending standards than our base case outlook”, with the regulator preparing the marketfor more permanent measures

2 - Our economy is strong enough

• Our banking system is sound, mortgage arrears rates are low at about 0.5-0.6 per cent across the country
• Household budgets are in good shape as we've been paying down our debts
• Inflation is contained and interest rates are low and likely to remain so for a while.

3 - Real estate is different in Australia

• Because people don’t just dump real estate. It gets very illiquid and hard to sell fast.
• The banks in Australia will come after you – Can’t just leave the keys and walk away like in the US.
• That in conjunction with the incentives of the US Gov to lend to those that couldn’t afford (thanks to guarantees) caused bad behaviour (Mortgage Backed Securities)
  • Like any addict – don’t incentivise them to indulge their behaviour

Devil’s advocate - To make our property markets crash we need one or more of the following four things.

1. A major depression(not just a recession). Nobody, other than Dent, is suggesting this will occur;
2. Massive unemploymentand people not able to keep paying their mortgages — unlikely;
3. Exceedingly high interest ratesso that home owners won’t be able to keep up their mortgage payments. Again, this isn’t on the horizon; and
4. An excessive oversupply of propertiesand no one wanting to buy them. Other than in a few spots this is not occurring in Australia.

What the future holds

1. Demographics
   • how many of us there are
   • how we live, where we want to live and what we can afford to live in
   • property will always be in demand – people need somewhere to live
   • interest rates, consumer confidence and government meddling.
2. Prices (Source: SQM Research) – 2018 forecasts (down a lot from 2017)
   • Perth 1-4%
   • Sydney -4% to 0%
   • Melbourne -3% to +1%
   • Brisbane 0% to 3%
   • Hobart 8% to 13%
   • Canberra – 1% to 4%

Maybe at some point he will be right, but what are the real risks to our economy?

1. Government spending money – printing and not getting out of debt
2. Fiat currency will lead to the devaluation of our money – inflation but thankfully, while being bad, aren’t as bad as the US.
3. Higher taxes – leading to unemployment
4. Or if the Gov takes over housing – that would be a guaranteed crash
5. Free market for housing allows choices – Government system wouldn’t.