Oh dear. Harry Dent is out there saying that Australian property could fall 50%.
Apparently our ‘debt bubble’ is going to burst.
Property permabear Martin North is in there too, cheering on.
I read these same forecasts all through the years 2012–17.
Property ran in Sydney and Melbourne in a big way regardless of such opinions.
My colleague (at the time) and I said it would do this.
Whilst Harry has been right on the bigger picture stock market and his work on demographics, I don’t know of any evidence as to why either of these gentlemen may be right on property.
An article in The Australian Financial Review in 2019 says North has been ‘wrong about the market pretty much since the early 2000s’.
20 years is a long wait. I suppose we can say he’ll be right eventually.
But why on Earth would property collapse now? Mortgage rates are at record lows.
Both the state and federal governments are planning huge infrastructure spending.
Land values will absorb this spending wherever this happens.
The government is also running up the national debt tab to prop the whole thing up.
I’m not saying this is what they should do. But I can’t ignore the facts.
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Housing unaffordable? Not really
Permabears also ignore several important points when it comes to property.
For example, they love to point out Australia’s high levels of private debt related to GDP. It was about 120% last time I checked.
GDP refers to national income. It leaves out the asset element of the equation.
The Australian property market is valued around $7 trillion.
It doesn’t take Einstein to work out that the debt measured against the asset is nowhere near as apocalyptic as the mainstream headlines like to scream.
A billionaire can take a hit to his income in one year and still be rich.
Permabears also love to screech how Australian property is unaffordable on single income metrics.
Yes, it is.
But there are two incomes bidding on real estate now. Single income metrics against property are redundant.
I had a colleague crunch the numbers for Melbourne last year on this very issue.
Let me show what he found. It plots Melbourne house prices with the combined household income for a couple with children…
Source: Fat Tail Media
It’s simply oscillated around a ratio of 3.5 or so for the last 20 years.
Nothing about today is particularly extreme.
House prices may seem to be unaffordable now. But housing has never been particularly ‘affordable’.
And yes there is an absurd amount of debt against Australian housing.
That’s what you get when you have a money system based on debt and leave the ‘windfall gains’ in property to be collected by the shrewd, corrupt, and just plain lucky.
Two ways to track a potential debt crisis
It’s a ridiculous and unjust system.
But, as stated above, we have to deal with the world as it is, not as we wish it to be.
The good news is you don’t have to listen to my opinion on this. The market agrees with me.
How can I say such a thing? That’s easy.
The Australian Financial Review tells us this morning that Australian bank bills (bonds) are trading below those of the Australian Government.
I’m a stock market guy, not a fixed income specialist.
But if the big players were worried about a housing collapse crashing the banks, this would not be happening.
Bank debt rates would be rising as buyers stepped away from the risk of default and contagion.
Another easy way to track the idea of a property collapse is to track bank shares.
They’ve taken a hit, no doubt, and are in for a difficult period. But don’t forget they have a direct line of support to the RBA for cash if needed.
The RBA had an allowance of $90 billion when the crisis broke out. The RBA’s recent update said the uptake from the banks had been $4 billion.
Again, there is very little about this to suggest the market is concerned with a credit crisis or asset collapse.
But hey, go and see this presentation and make up your own mind.
I know which way I’m betting — and why. Do you?
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