Why the housing bounce signals ‘sell!’

Tuesday, 3 December 2019
Adelaide, Australia
By Bernd Struben

  • About-face!
  • Spearheading the next crisis

Australia has the second biggest real estate bubble in the world. And it will not last.

Bestselling author and futurist, Harry S Dent

You’ve probably heard the good news by now.

Australia’s housing downturn is officially over.

It got a bit ugly there for a while, with some of the higher end residences in Sydney and Melbourne falling by 20%.

But that’s all behind us.

From The Australian:

Based on November sales figures [from CoreLogic], dwelling prices advanced in all eight capital cities in November, including by 2.7 per cent in Sydney, 2.3 per cent in Melbourne and 0.8 per cent in Brisbane and the Gold Coast where prices are now back near their April 2018 peak.

The 2.7 per cent rise in Sydney prices was the fastest since October 1988…

Sydney and Melbourne house prices have recovered to within 8 per cent and 4 per cent of their respective peaks in late 2017…’

Did you get that? Sydney is seeing the fastest house prices rises in 31 years.

Never mind that household wages have barely budged over the past nine years. Or that the latest government figures, as the AFR notes, ‘showed that labour productivity fell 0.2 per cent in fiscal 2019, or even more, down 0.8 per cent when adjusted for the quality of work performed’.

That’s the first time labour productivity has slipped backward since the government began tracking the data in 1994, by the way.

No worries, though. Not so long as our homes are going up in value. Australia’s beleaguered retailers could even finally get the spending surge they’ve been waiting for.

From The Australian:

The break in the spending drought could be close, as booming house prices drive a “wealth effect” that is creating a reservoir of spending firepower, according to new research by investment bank UBS...’

Who do we have to thank for the renewed surge in house prices and the resulting ‘wealth effect’?

First, Aussie voters. That’s for denying Labor the election and preventing the party from scaling back negative gearing on investment properties. That also enabled the Liberals to roll out their first homeowner guarantees.

Second, simple supply and demand dynamics…meaning low levels of new supply coupled with high population growth and foreign investor demand.

But the Reserve Bank of Australia (RBA) deserves the lion’s share of our gratitude. After cutting rates three times this year, to a record low 0.75%, the RBA held fire today. But investors still widely expect another cut…or two…in 2020.

Record low interest rates mean home buyers can take on record amounts of debt.

And they have.

With this, erm, rosy picture in mind, I thought you might like to hear how US economist and forecaster Harry Dent sees the current recovery playing out.

Harry was in Australia in November. And analyst Selva Freigedo snared him for a video interview, for Harry Dent’s Boom & Bust Letter subscribers.

So what are his thoughts on the return to rapid price growth in Aussie real estate?

It’s the beginning of the bust rather than the recovery.’

We’ll get back to Harry’s forecast for Australia right after a look at the markets, where all the major global indices we track closed at, or are trading, deep in the red.

Invest wisely.

About-face!

As a handy reminder of why you shouldn’t invest on the back of mainstream financial news reports, here’s a headline from yesterday’s Australian Financial Review (AFR): ‘Record high sets Australian shares up for “Santa rally”’.

Now not to pick on the AFR. Record highs are often followed by additional new highs. And then there was China’s official manufacturing purchasing managers’ index. It climbed unexpectedly, hitting its highest level since April.

To be fair, there’s still a decent chance for the old ‘Santa rally’ to rear its magical head over the next three weeks.

Just don’t underestimate all the moving parts involved to make that happen.

The finger of blame for today’s slump points squarely at the US.

First, US manufacturing data disappointed to the downside. Again. The Institute for Supply Management (ISM) reported US manufacturing shrank in November. That’s four months running it’s contracted.

Second…Donald Trump.

The market-mover-in-chief took a swipe at Brazil and Argentina for unfairly and aggressively devaluing their currencies. Or perhaps presiding over economies overwhelmed by hyperinflation…

Potato…potato…

Trump moved to impose tariffs on Brazilian and Argentinian steel and aluminium imports into the US. He’s also eyeing potential tariffs on France for its imposition of a digital sales tax. One that overwhelmingly impacts US companies like Amazon.

The only silver lining on the tariff front is China’s response to US’ official support of Hong Kong’s democracy protesters. So far, China has steered clear of trade related retaliations. A ‘phase one’ trade deal still looks achievable…

Markets

Overnight, the Dow Jones Industrial Average closed down 268.37 points, or 0.96%.

The S&P 500 closed down 27.11 points, or 0.86%.

In Europe the Euro Stoxx 50 index closed down 76.92 points, or 2.08%. Meanwhile, the FTSE 100 lost 0.82% and Germany’s DAX closed down 271.70 points, or 2.05%.

In Asian markets Japan’s Nikkei 225 is down 157.37 points, or 0.67%. China’s CSI 300 is flat at 0.00%.

The S&P/ASX 200 is down 156.87 points, or 2.29%. Ouch!

West Texas Intermediate crude oil is US$56.04 per barrel. Brent crude is US$60.92 per barrel.

Turning to gold, the yellow metal is trading for US$1,462.49 (AU$2,145.36) per troy ounce. Silver is US$16.92 (AU$24.82) per troy ounce.

One bitcoin is worth US$7,327.17.

The Aussie dollar is worth 68.17 US cents.

Spearheading the next crisis

Getting back to Harry Dent’s less than optimistic forecast for Australia’s property market…

Harry told Selva that, ‘Australia is leading the next global real estate crisis.

Why?

Because Australia has the second most overvalued market in the world.

And according to Harry, Sydney’s average house price is now 11.7 times the annual income of ‘the everyday person’. In Melbourne it’s 9.7 times. Only Hong Kong, at 20.6 times is higher.

That’s far more than the historical 2–4 times income you’d expect in a sustainable housing market.

Real estate can only go so high before young people can’t afford it at all,’ Harry says. And Australia is at that point now.

You have this expensive real estate and it started to crack in 2017. And it went down more on the high end. That’s important because the last global real estate crisis, which did not hit here so much, started in the US. The subprime crisis, started on the low end of the market and then spread to the high end.

Everywhere I look now it’s the high end that’s starting to crack. Manhattan, Miami, Sydney, Melbourne. The wealthiest people have spent the most on real estate. Foreign buyers, particularly the Chinese here, have been driving up the high end of the market. And that’s what’s starting to crack.’

Harry issues a stark warning to people who ‘bought the dip’ after house prices fell.

The selling was not overdone. It’s not time to buy again. No. ‘This bounce is what you sell into.’

Down markets don’t go straight down. Not in stocks. And not in property. And property downturns tend to run a lot longer than stock market crashes. Stock crashes usually run two to three years. But real estate downturns last four to six years.

Harry expects the current bounce to last less than nine more months. And the coming downturn could wipe 40% off average property prices.

In real estate, he cautions, you need to get out on the early side far more than with stocks.

When people see real estate start to go down it freezes up. That’s because people, especially here in Australia, believe real estate only ever goes up.’

When stocks fall you can usually sell your shares quite easily. But when property falls, the buyers disappear into the woodwork. That’s what happened in US markets in 2008–09.

While Harry expects Australia to lead the next global real estate rout, he says China will be the trigger.

Wealth will evaporate in China faster than any country in history.’

Australia’s close ties to China means we’ll be the most affected.

But it’s not all doom and gloom.

Harry says it’s the real estate crash we need.

Popping the housing bubble will be great for you. It will bring down the cost of living.

Of course that won’t come without a lot of pain. At least for those who are unprepared for what’s coming.

In his new book, Zero Hour, Harry helps prepare everyday Aussies for what he sees on the horizon. And to set yourself up for the opportunities that will arise after the dust finally settles.

Find out how to get your copy of Zero Hour here.

Cheers,
Bernd