We have seen this headline time and time again over the last few years, the Australian economy struggling, the Australian property market has pushed too far ahead and is on the verge of collapse. Time and time again the economy, the real estate market and the prospects for Australia seem to go against the trend. This is an economy which did not even dip into recession during the worldwide “depression” which was brought about by the US mortgage crisis. So, does the US demographer Harry Dent have a valid argument for predicting a collapse in Australian property prices of between 30% and 50%?
We will now take a look at the main components of the argument that Australian real estate is overvalued and is on the verge of a collapse. We will also take a look at the counterarguments which support this very popular real estate market.
Chinese interest in Australian real estate
It is no surprise and no secret to learn that Chinese investors have been pouring money into the Australian real estate market as they have in London and an array of other markets around the world. While there may be areas of the Australian real estate market which have benefited more than others, i.e. the main cities and towns, there is also very strong domestic demand. This has been brought about by the ever-growing natural resources sector which has been the main component of Australian economic strength over the last decade or so.
Quote from PropertyForum.com : “Over the last 10 years or so we have seen periodical concerns that the Australian property market is out of control, creating a dangerous bubble which is about to burst. We have seen government, opposition leaders and an array of consumer associations across Australia looking at ways to control property prices and allow the younger…..”
Harry Dent believes that China is headed for an economic collapse which will have a major impact upon Chinese investors, their savings and may force some people to repatriate their assets. When you bear in mind that Chinese investment is a major element of the Australian property market, although not the only guiding light, this will likely have some impact especially in areas where property prices have been buoyant.
Price to income ratios
While there are some elements of the argument which seem a little far-fetched, there is no doubt that property prices in China have pushed ahead over the short to medium term and indeed the Chinese authorities have attempted on numerous occasions to rein back this growth. So far these attempts have been relatively unsuccessful but if history is any guide then the Chinese authorities will eventually get their way.
The comments attributed to Harry Dent suggest the property price to income ratio in China is around 30 times and the level in Sydney and Melbourne around 10 times. He is citing the collapse in California real estate some years ago which was triggered by a 10 times income to property price ratio although in reality we are living in very different times. It is worth noting that worldwide interest rates are at record lows, there is liquid finance available to keep the worldwide economy moving and even countries such as the UK, where real estate is strong and the economy is improving, do not foresee a short-term increase in base rates.
It is likely that we will see a reduction in Chinese overseas real estate investment in the short to medium term but whether this leads to a collapse of anywhere up to 50% in Australian property prices is debatable. We will need to see an unwinding of the worldwide interest rate situation in due course, worldwide real estate markets may mark time during this process but to suggest a reduction of between 30% and 50% in the value of Australian real estate seems far-fetched. It is also worth noting that the Australian economy has remained relatively strong of late, previous and current governments have invested impressively for the future and Australia now has a presence on the worldwide trading arena the like of which it has not enjoyed before.
For some reason the Australian real estate market seems to attract more than its fair share of criticism, boom and bust scenarios and forecasts of significant asset price drops. However, it has proved to be resilient in the past, the economy is not on the verge of collapse and while we may see a deflating of localised property price bubbles across Australia very few people expect a collapse.