What do Chernobyl, Hiroshima, and real estate have in common?

Friday, 27 September 2019
By Harry Dent

Editor’s note: Our Melbourne HQ is closed today in honour of the AFL Grand Final holiday, a state holiday in Victoria. While our staff is away for the day, we hope you enjoy this special guest essay, from the legendary Harry S Dent.

You’ve probably heard of Harry. He’s one of the most successful — and controversial — economic futurists in the world. He predicted Japan’s 1989 economic collapse, the dotcom and subprime busts, as well as the populist wave that brought Brexit and Donald Trump…all well before the mainstream media.

We were thrilled when Harry joined up with Port Phillip Publishing to share his insights with our readers in June 2018. The essay below is taken from Harry Dent’s Boom & Bust Letter.

Read on to find out why the real estate markets won’t ever be the same again.

And if you haven’t already secured a discount copy of Harry’s bestselling book, Zero Hour, simply click here for the details now.

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Millions were affected by all three disasters, whether directly or indirectly. Some got rich while many were killed or maimed. Others suffered psychological and emotional injury for the rest of their lives. And decades later, the damage and aftermath still has normal people scared to venture in too far.

In fact, while Hiroshima is now known as the City of Peace, a desirable location for international conferences on social issues, Japan’s real estate is an ever-expanding waste land.

In 1989, as the world prepared itself for a great depression across developed countries and Japan’s takeover of the world, the Land of the Rising Sun did something only I expected. It’s real estate (and economy) rolled over and died. It lost 60–70% into the 1990s. At the same time, and again something only I foresaw, the US markets (along with its real estate) zoomed to the moon.

Everyone was stunned. Except me. My demographic research had warned that Japanese demographic trends and real estate faced a brutal longer-term collapse. Even as its small millennial generation moved into and through its peak home buying cycle between 1997 and 2015, Japanese home prices stayed at crushingly low prices.

Today, swaths of communities in Japan stand like ghost towns, and the situation will only get worse because the country is dying. There are more people dying from old age than younger ones buying homes. The most recent numbers we have are from 2017, but rest assured things have only gotten worse: the country’s population growth is -0.21% per year with only 7.7 births per 1,000 people and 9.8 deaths per 1,000 people!

And when someone dies, what happens to their home? It hits the market as an estate sale, where price isn’t as important as just offloading it to wrap everything up neatly. Supply outpaces demand. Prices stay depressed at best, go lower at worst.

If Japanese real estate has had a torrid three decades, it’s future looks even more grim into 2033.



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Source: Ministry of Health, Labour and Welfare, Japan, Dallas Fed
Click to enlarge

Japan already has 8.4 million, or 14%, empty homes after its net demand went negative in 1997. Imagine how many homes will be empty by the bottom in 2033?

The thing is, Japan is the leading indicator for real estate in the developed world, including the US. Our net demand for homes peaked in 2002, but the financial bubble — where banks would give mortgages to anyone, regardless of their ability to repay — kept it going into early 2006. At that point, it was overvalued by about 20%. Then the foundations began to crumble and prices crashed 34% in the Great Recession.

Since then, prices have recovered sharply, forming a second real estate bubble. But this bubble cannot and will not last much longer. For one, our baby boomer generation is now heading down the real-estate hill with increasing speed. Diers continue to outpace buyers…a phenomenon that will only gather pace in the years ahead.

In 2017, there were about 11.8 births per 1,000 of the US population. That same year, there were about 7.3 deaths per 1,000 people. While not yet negative, in a revelation that again shocked all but me (and my team at Dent Research), the US birth rate has fallen for four consecutive years, bringing the number of births per year to the lowest level in 32 years! They will decline more rapidly in the deep downturn ahead between 2020 and 2023. And our housing net demand growth rate has declined sharply, and will continue to do so until the last of the boomers leave us into around 2039.

Even though prices are similar in this second bubble to those in the first, maybe a bit lower when we adjust for inflation, the net demand is substantially lower…and headed lower still.



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Source: U.S. Census Bureau
Click to enlarge

We saw what a 34% decline in home prices did to spike foreclosures, destroy net worth, and bring the banking system and economy to its knees. Instead of 20%, homes are now overvalued 41%, and will drop below fair value as before. Just imagine what a 50% decline in value will do!

As I started by saying, like Chernobyl and Hiroshima, the Japanese real estate collapse after 1991, and the US real estate collapse after 2006 devastated millions. Demographic Armageddon will destroy the US property market ahead (and keep the Japanese one depressed). Real estate is transitioning from perhaps the greatest risk-adjusted wealth-building investment in the last 80 years…to the worst from now until around 2039-plus.

But that’s not the worst of it. The real estate market faces several additional challenges that I don’t believe it can overcome, one of which being the millennials…who are now gun shy after seeing what collapsing real estate prices did to their parents.

The awful, indisputable truth is…

Real Estate Will Never. Be. The. Same. Again.

Since the Bob Hope generation returned from the Second World War, real estate has been an immense wealth building tool. Home ownership levels first soared thanks to the rise of the middle class, aided by GI benefits and higher incomes earned as the assembly-line and the mass-production revolution unfolded.

The next chart shows this dramatic rise in homeownership between 1938 and 1968.



chart image
Source: U.S. Census Bureau
Click to enlarge

Homeownership went from 43% in 1938 to 64% in 1968 — an increase of 21% points, or 49%.

The baby boom took the rate of homeownership to a peak of 69.2%, another 5% points higher. But that was far from its biggest impact. The baby boomer’s peak immigration-adjusted births were 5.34 million, 61% higher than the 3.31 million for the Bob Hope generation.

So, 61% more people with higher ownership brought the compound impact on demand up to around 74%. The Bob Hope generation increased demand by 49%, the boomers by 74% on top of that. All told, the market saw a cumulative increase in demand of something like 260%!

Add to that the dramatically falling interest rates from unprecedented high levels of demand and you can see why real estate saw the greatest bubble in modern history into 2006. The hopefully one-time event of the Fed and central banks forcing short-term rates to zero and long-term rates down 2% or more since 2009, breathed live back into the real estate bubble from 2012 into 2019.

Now, the air is leaking out again. And the unfortunately reality is that real estate is NOT the great investment everyone thinks it is. Home prices rise only with inflation over the long term. Hence, real estate yields a zero-appreciation return adjusted for inflation. Robert Shiller demonstrated this reality by analysing prices and inflation all the way from 1890.



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Source: http://www.econ.yale.edu
Click to enlarge

Note that real estate under-performed inflation in the 1910s through 1930s due to the new mass manufacturing trend of that era and the deep downturn of the Great Depression. Then it was back to normal after a strong surge into the ’50s and ’60s. After that, it moved mostly sideways (adjusted for inflation).

That spike from the mid-1990s forward is a result of the massive baby boom generation moving into the peak of its home-buying cycle on a 41-year lag to births, as I’ve already discussed.

Here’s the thing — and I can’t overstate this enough — real estate will NOT be the investment it was for the boomers during their peak home buying years — and all the way back to the 1940s. It will NOT be the investment that will make Generation Z (the second wave of millennials) wealthy. It will not be the best investment for their kids, either.

Let me say that again because it’s hard for baby boomers to hear: Real estate will NOT be the path to wealth that it was since the Second World War.

Worse yet, as diers continue to outpace buyers on US soil, and as millennials increasingly resist buying the McMansions of their parents and grandparents, the current real estate bubble will deflate and there will be a second round of financial pain…right when baby boomers need financial security the most.

The shocking reality is that baby boomers and many remaining Bob Hopers still hold a shocking amount in mortgage debt. […]

At the start of this edition, I compared real estate to Chernobyl and Hiroshima. I did not do so lightly or flippantly. The comparison is important because, just like victims of both disasters, millennials are reluctant to become involved in a market they’ve already seen implode once before. They don’t have the blind faith of their parents that real estate prices will always go up.

To add insult to injury, millennials think and buy differently from the boomers and Generation X. They are creating the ‘sharing economy’ one car, room, apartment, and house at a time. They value experiences over material things like bigger houses and cars. They view debt in a very different light as well. They don’t want to overload themselves with mortgage repayments each month. Rather, they want to maintain lifestyle over asset accumulation. […]

Then there’s the millennial trend towards smaller and micro houses. This is a generation that doesn’t want to be locked down in a McMansion that is expensive to maintain and near impossible to own. So, as boomers look to move out of their huge, dream homes, there are going to be few takers to buy them. Supply will increase. Demand won’t. Prices will plummet as a result. […]

When I consider the real estate market, I don’t confine myself to just the US. With globalisation at current levels, if Chinese property prices start to crumble, for example, the entire world will feel the pain. Because of the interconnected nature of the global economy, I constantly monitor real estate in many countries. […]

But outside of Israel, which has Old Testament-like birth trends, the best demographic trends are in Australia.



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Source: United Nations Population Division, Dallas Fed Reserve
Click to enlarge

Net demand Down Under peaked around 2015 and its real estate bubble peaked in early 2017. It is leading the world to the downside, a trend that will bottom around 2021-plus. Currently, Australian real estate is overvalued by about 42%. My models suggest the country will endure 50% (if not more) declines in property prices…a reality no one there expects after its decades-long Teflon market and no recession for 28 years!

Worse, even with one more surge into around 2025, net demand never gets higher than the peak and the bubble will be worn off by then, so no chance of higher prices there again. There’s no way that the bounce into 2025 or so will get anywhere near the recent extreme bubble peaks.

The big difference in Australia is that demand never gets even near negative, so there will be demand for new homes and continued homebuilding, just not at the rates seen in the last two decades.

This is a country, along with Singapore, New Zealand, and Israel, where you could buy real estate for the long term after prices crash ahead. But we will still not see bubbles and appreciation like we saw in the last boom.

Gone forever are the days when you could buy a huge home and then sit back and watch its value appreciate and the cash roll in. Real estate will go back to being something bought for the love of it, for the business of it, and for survival.

What did we learn in Monopoly? You buy real estate for the rents, not the appreciation!

Regards,
Harry Dent