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Putting a Dent in the Bubble Talk

Wow, has there been some media recently on the US global economics forecaster, Harry Dent, who is predicting – wait for it – the long awaited, long foretold, completely mythical burst of the bubble in Australian real estate!

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By John McGrath

Wow, has there been some media recently on the US global economics forecaster, Harry Dent, who is predicting – wait for it – the long awaited, long foretold, completely mythical burst of the bubble in Australian real estate!

According to various reports of interviews with Dent, who is here to promote his books and seminars, he reckons Australia’s property prices are going to tumble by as much as 50% and the time to start worrying about this is right now.

Seriously?

I’ve been in Australian real estate for over 30 years and believe me, the word ‘bubble’ is one of the most grossly overused words we get from people who do not understand Australia’s unique real estate market. 

The idea of a price bust over the next couple of years is contrary to all the hard evidence we have that we are now well into a new growth cycle.  We’ve got extremely healthy clearance rates, record levels of borrowing, strong investment activity and significant foreign interest in prestige real estate – and all of this is happening exactly where it always does at the start of an Australian property growth phase, Sydney.

Are people over-leveraging? No. Latest data from Australia’s largest mortgage broker, AFG shows the average loan to value ratio of today’s buyers is 68% –  well below most banks’ comfort zone of 80%.  And guess what, the average LVR in Australia’s most expensive market, Sydney, is actually less than the national average – 64.5%.

The property market has a strong foundation supporting it. We have low unemployment (despite recent job losses), a strong and resilient economy, low interest rates, a tax system that rewards property investment and a massive undersupply of housing in the face of rising population growth. And then there’s the cultural factor that doesn’t apply in many other countries and should never be underestimated – we are obsessed with property!

In the biggest global financial crisis of our time, Australian property prices didn’t crumble. Sure, they came off the boil for a while and definitely went backwards in specific locations such as mortgage belt suburbs, tourism towns where massive jobs were lost and holiday-style locations where the wealthy liquidated their weekenders.  But on the whole, we came out of the GFC with flying colours and now we’re seen as one of the world’s strongest and most mature economies.

Here’s a few reasons why Australian property prices will stay strong – both now and into the future. 

The Great Australian Dream of home ownership lives on.  Sure, many Gen Ys don’t want to tread the traditional path of buying a first home on the outskirts – instead they’re investing there just to get a start in the market.  It’s the shape of the dream that’s changing, not the dream itself.   

We have a tax system that supports investment. Negative gearing, depreciation and so on. When the market cycle hits bottom, it’s the investors that pick it back up while yields are high. It happens in every cycle and right now, 1 in 2 buyers in NSW and around 1 in 3 buyers in other states are investors.

Dent argues a China bust would hurt our property market. Sure it would. But it won’t be the catastrophic event he predicts. We’re already going through a mining investment slow down because China isn’t buying as much. And we’ve got record low interest rates and an RBA jawboning to get the dollar low enough for other sectors of the economy to fill the void.  This is a world class economy and we’re preparing for imminent changes.

Sydney is a huge international city. Sure, real estate is expensive but it’s not impossible, there are still plenty of opportunities. And when it does get tough, markets evolve. Undesirable areas undergo change and gentrification – look at Redfern in Sydney.  People adapt!

Dent specifically points out that coastal real estate markets are the most in danger. Australia has an aging population and we’re going to see great growth in coastal locations over the next 20 years as more seniors take up the traditional Aussie dream of retiring on the coast.

The ability to buy real estate through self-managed super funds has opened up a whole new market for Australian property. This trend is only just getting going and it will encourage more investment in real estate well into the future.

Chinese interest in Australian real estate is rising. It’s going to be a key influencer in our prestige market recovery with plenty of room left to run given China’s burgeoning middle upper class.

The worst thing scaremongering can do is scare people away from great opportunities. History tells us there is no reason to doubt the tenacity of our property market following its outstanding long term performance.  Stick to your game plan!