Harry leaves a dent on Australia

Harry S Dent is a well known author and founder of HS Dent Investment Management, an investment firm based in Tampa, Florida. Dent writes a regular economic newsletter and has written seven books analysing demographic trends and their affect on the economy and asset markets.

I first stumbled across Dent’s work early last year at my local library. Dent had recently released his latest book, The Great Depression Ahead, which I promptly borrowed and read cover-to-cover in only two days. His book sparked a keen interest demographics, which I have displayed on numerous occasions on MacroBusiness as well as my former blog.

Harry Dent is currently touring Australia undertaking a number of seminars and interviews in promotion of his upcoming book, The Great Crash Ahead. In a series of recent interviews, Dent has made some alarmist forecasts for the Australian housing market. An August Herald Sun article reported that Dent predicted that Australian housing prices could fall by 60% in value:

…leading US economist Harry Dent said Australia’s real estate market was the most overvalued in the Western world.

He said that Australia’s property market could follow a similar path to Japan’s crash in the late 1980s, when housing prices there declined by 60 per cent.

Dent then followed-up on Monday with some more warnings that Australia’s housing market was headed for a crash due to the combination of population ageing and the sovereign debt crisis developing in Europe and beyond:

Housing market doomsayer Harry Dent has set his sights on the Australian property industry once again, predicting that a crash is set to occur within the next 12 months that will bring housing prices back to realistic levels…

“Australia is probably the best place in the world to survive this, but we do think Australia will not escape as well as it did from the last crisis (in 2008),” he said.

“People in places like Sydney or Tokyo or Miami say, ‘Hey, real estate can never go down here, we’re a great place, everyone wants to move here, there’s not much land for development’, and what I say is that is exactly the kind of place that bubbles.”

Dent has commented that Australia has the most expensive housing in the world when compared to household income levels. He says that because baby boomers have finished up spending in the market, prices are set to deflate.

But he also says the global economy is set to experience a crash due to sovereign debt, and that other assets will suffer as well.

As explained previously, I do not consider a Dent-style housing crash for Australia at all likely. Nevertheless, Dent does make some interesting observations that are worth exploring.

First, Dent’s comment that “People in places like Sydney or Tokyo or Miami say, ‘Hey, real estate can never go down here, we’re a great place, everyone wants to move here, there’s not much land for development’, and what I say is that is exactly the kind of place that bubbles” is spot on.

Regular readers will recognise that the markets referred to by Dent are those where supply is/was constrained by either physical or regulatory barriers to housing supply (read about Miami here), and that housing markets with unresponsive supply are prone to volatile boom/bust cycles. In fact, constrained supply is a necessary pre-condition for developing a serious housing bubble.

Dent’s comment that house prices are set to deflate because “baby boomers have finished up spending in the market” is something that I have discussed frequently on this blog (most recently last week, except in relation to retail sales). To illustrate the potential impact of Dent’s observation, consider the below charts, which have been devised using data from the recently released ABS household income and expenditure surveys.

First, the per capita (adjusted for household size) household earnings and expenditure patterns of different age cohorts:

And the average weekly per capita household savings by age cohort, which has been calculated by subtracting expenditure from incomes:

Some interesting observations can be deduced from these charts. Firstly, savings are typically highest between the age of 25 to 34. This is the key household formation age whereby couples save to purchase their first home.

Between the ages of 35 to 44, household finances are typically tight as households pay-down their mortgages and costs relating to raising children are at their highest level (think school fees).

Between the ages of 45 to 54 and 55 to 64, children leave home and adult earnings hit their peak. Households are also increasingly focused on accumulating assets for their retirement.

From the age of 65 onwards, both incomes and expenditures shrink as individuals enter retirement. Assets accumulated over one’s working life are also divested.

The above break-down of the ABS’ income and expenditure surveys have important implications for asset prices, including housing. The 25-34 year age group is the key cohort to watch for owner-occupied housing, whereas the the 45 to 54 and the 55 to 64 age groups are the key cohorts that purchase investment properties and holiday homes (remember the Baby Boomers own half of Australia’s second homes). By contrast, the over 65’s are more likely to sell their investment properties and/or downsize in order to free-up funds for their retirement.

Now look at the projected trajectory of Australia’s population using the ABS’ medium growth forecasts:

As you can see, the key home buying age groups are predicted to shrink in relative size just as the over 65 home sellers balloon in size. Note also the big rise in the 45 to 54 and 55 to 64 year age groups (partly offset by a fall in the 25 to 34 year olds) between 1990 and now – commensurate with the huge surge of negatively geared housing investment and the sharp rise in house prices experienced over the past decade or so.

What should be clear from the above analysis is that the age structure of the Australian population suggests that the demographic demand for housing is likely to slow significantly (albeit gradually) over the coming decades.

It should be noted, however, that these findings alone do not necessarily imply falling real asset prices, since prices are also influenced by other factors, such as income growth, which could compensate for the impacts of ageing. Rather, the purpose of this analysis is simply to highlight that Australian asset price growth will be more difficult to achieve over the next several decades, due to the demographic headwinds of ageing, than was achieved over previous decades.

The above analysis supports a 2010 Bank for International Settlements (BIS) working paper, which examined the impact of changing demographics on asset prices (particularly housing) in 22 advanced nations over the next 40 years. The results suggested that ageing will lower real house prices compared to neutral demographics (i.e. where the age profile of the population remains constant) over the next 40 years in all 22 countries in the sample.

The below BIS chart, which shows the demographic impact on house prices over the past 40 years (1970 to 2009) and the next 40 years (2010 to 2050), is particularly relevant for Australia’s housing market.

According to the BIS, as the Baby Boomers reached working age and started buying housing from 1970, they helped to push-up property prices throughout the world. In Australia, over the past 40 years the Boomers increased real house prices by around 30% compared with what would have occurred had our age structure remained neutral. However, the ageing of the Baby Boomers is projected to reduce Australia’s real house price growth by around 30% over the next 40 years compared to neutral demographics. This is because the Baby Boomers will reduce their housing stock as they enter retirement by liquidating their investment property holdings and downsizing, thereby depressing house prices.

Although Harry Dent’s prediction that the Australian housing market will crash is somewhat hysterical, his analysis of the impacts of population ageing on the economy and asset prices is ground-breaking and deserves your attention.

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Comments

    • and yet on the other hand apparently predicted Japans “lost decade”.

      I do agree with you though and that Dow prediction makes me wary.

      As Leith says his work is still worth looking at despite that rather bold prediction for the Dow.

    • Dent’s predictions usually overshoot on the upside and the downside but the overall message of his predictions is spot on. He predicted Japan’s lost decade when almost everyone else was predicting their unstoppable rise and he called the US housing bust and the end of consumer led growth.

      If he says houses could fall by 60% in the next few years it probably means houses could fall by 30%, but more likely 10%, 15% or maybe 20%.

      As with Jeremy Grantham, I say anyone who ignores Harry S Dent does so at their own peril.

      • a point on forecasting gurus..

        if one makes 100’s of predictions and gets 5 right does that make him a guru, it amazes me how quickly people forget wrong predictions.

        All those “i predicted the GFC” crowd, they dont bring up their failed predictions nearly as readily

        • That’s a very valid point. I think someone (with time on their hands) ought to build a register to keep track of every economist’s predictions. It should count the total number of calls (right and wrong). The economists could then be ranked in order of % correct. I might register the domain http://www.economistrankings.com.au. What do you think? 🙂

          • The problem with predictions is that often the makers of the rules change the rules, or game the system in order to squash any predictions.

            In other words economics isn’t enough to make a prediction anymore – you need to be an expert in politics and lobbying and how the vested interests will change the laws or system so that outcomes will change.

            Many examples come to mind – the FHBG, relaxed foreign investment restrictions, allowing super into the housing market with leverage, cementing a deposit claim scheme without banks paying insurance, using taxpayer money to buy mortgage bonds and plenty more! Those are policies that most people would of never thought of when making their forecast. Economics is more scientific than politics.

          • It might make individuals more cautious in their pronouncements.

            On the other hand, if you held a coin-flipping competition, somebody would win. But the victory wouldn’t prove much about that somebody.

        • They do Sherlock, they’re called hedge funds.

          The whole idea of Macrobusiness is to blend economics (both an understanding and empirical observation of reality and how mainstream economists warp this reality and thus shape political/monetary decision making), geo-politics (including media, foreign relations, domestic etc) and market dynamics (equities, FX, debt and property).

          Its a high hurdle to shape this together but worthwhile pursuing.

        • There have already been studies on the the success rate of economic forecasters and its not pretty. If fact the more famous the forecaster the worst his track record. read Taleb “Fooled by Randomness” and “The Black Swan”; also “Ubiquity” by Mark Buchanan.
          Here what CJ says about forecasting
          http://www.businessspectator.com.au/bs.nsf/Article/Forecasting-the-future-is-a-dud-pd20091105-XGVHN?OpenDocument&src=srch

          Its frightening that the RBA is using its forecasts to determine interest rates and its track record is very low.

    • I think people missed the point on DOW 40000. A few others like Marc Faber, Roubini, etc, all said something similar about the DOW in a Hyperinflation scenario, and that Hyperinflation was a very real possibility if the US persisted with QE.

      A couple of them clarified it by saying the true measure of the DOW’s worth would be compared to the value of Gold which will eventually reach parity with the DOW. Whether that parity occurs at 2000, 5000, or 40000 remains to be seen.

    • I think we can be fairly confident that house prices will collapse by 60% + and it has nothing to do with demographics or land supply/restriction and everything to do with one simple ratio.
      In Oz the 4 TBTF banks have balance sheets of about $2450 Billion against Aussie GDP of around $1300 Billion. Thats almost 190% of GDP ! How much more crazy is this ration going to get 200% 400% ? Even in the US the home of financial excess the major banks have liabilities of around 40% of GDP. Imagine if it got to $5000B against GDP of say $2000B would makrets continue to fund the banks ? What would happen if the Feds had to step in and save one ?
      Too big to fail too big to bail !
      Now that credit growth is starting to head lower and potentialy negative soon we will experience debt deflation with all the horror that implies.
      Steve Keen was right as was Shakespeare

      “Neither a borrower nor a lender be “

      • Spot on. The other factor to consider is that boomers own 51% of investment property, which is intended to pay for their retirement. If prices start to fall there is likely to be a rush for the doors to save whatever value is left.

  1. UE, love your work (and the rest of MB’s), have been following you since before you formed MB. I am grateful to you for providing me with the evidence and arguments to support my gut feeling that investment in property is currently a poor option. I was amazed to see a story on your Australian Housing Valuation Report in the MSM yesterday, (I think it was in an on-line article in the Fairfax press), referring to MB. I can’t seem to find it today which is puzzling.

    I have a question for you. You have convincingly built a case that regulatory supply constraints are a usual pre-condition for housing bubbles, and advocate governments loosening supply to provide for more responsive markets. What is your view though on the use of prime arable land on the outskirts of metropolitan areas for new housing developments? For example, in Adelaide the area around Mt Barker in the Adelaide Hills, and the area around Virginia on the Adelaide plains, both prime market gardening areas, are increasingly being encroached upon by housing. The loss of arable land to unproductive housing carries with it a loss of economic productivity. Is it worth sacrificing future productive industry in these areas (and the employment that comes with it) in order to address housing affordability? I am not sure whether that is precisely what you are advocating, but that appears to be short-term thinking.

    I accept that not all land outside the urban fringes is prime agricultural. Marginal farm land may very well be put to better use in easing supply constraints in housing. I would be very interested, however, in your views on the conflict between opening up land supply and losing forever some of the most productive land we have. Which is the more pressing issue? Is housing affordability so important to our economy that we can ‘afford’ to forego productive capacity?

    Cheers
    TN

        • The pragmatic answer to what you are asking, is this.
          The output of an urban economy in dollar terms, is literally dozens of times higher per unit of land taken up, than the output of a rural economy.
          There might be strategic justification for some countries to preserve enough farmland to feed their own population – so what does Japan do – invade other countries? But there is no pragmatic or economic justification for a substantial exporter of primary products, to “preserve farmland” and in the process, drive up the price of land in its urban economy (including the cost of housing the workforce which ultimately is a labour cost input) and help put automotive product and whiteware manufacturers out of business. And nations that “preserve farmland” in this way, DO kill off their international industrial base – look at Britain.
          International GDP has grown about fourfold in six decades. Six decades ago, total rural GDP was roughly equal to total “urban” GDP. All the “growth” has occurred in the world’s “urban” GDP. Rural output has increased but prices have declined. While we often read of “rising prices” for primary products, these have for six decades been falling as a trend, the rises have been temporary and slight when compared to the trend.
          IF it WAS ever truly ECONOMICALLY worthwhile to “preserve farmland” rather than convert it to “urban” use, then the price of farmland on the free market would be higher than the NET (unimproved) price that developed urban land was already selling for. But food would have to be dozens or even hundreds of times more expensive than it now is.

          • Rubbish! ( Sorry!)

            Our farmland is being subsumed to house more people to visit each others coffee shops and hair salons. We need more government employees to make up more euphemisms to cover the grab for power. More lawyers to complicate the life of everyone tying to actually do or produce anything.

            The output of the urban economy in Australia is driven by debt not production. We have destroyed farm communities wholesale for what?
            We are now completing the job on manufacturing.
            We’ll ‘eke out a living taking in each other’s washing’ living in cities. When we want something we’ll just import it!!!!
            Australia does not value its industries properly so a proper assessment of the productivity of urban vs rural lands is simply nonsense.

          • Flawse sounds to me like a country bumpkin with deeply prejudiced and stereotyped views of the “urban economy”.

            Any national economy will be running on debt if it exports less than it imports. And if you rely on farming produce, you simply are never going to remain in the first world for long. It is essential to have a productive, urban industry export sector to provide the real high income that a nation needs to be a first world country.

            Australia and NZ could and should, export 4 times as much value added goods and services from their urban economies, as the total they export from their rural economies. Of course lawyers and coffee makers are not part of this process. I was not talking about them.

            It is ridiculous to make a whiteware manufacturer pay as much for one hectare of land as a farmer pays for 1000 hectares, when the whiteware manufacturer will create far more income with the one hectare as the farmer does with his 1000.

            If you can possibly get to watch this video, it is very interesting;

            Prof (Sir) Paul Callaghan on NZ’s future prosperity.

            http://vimeo.com/24850332

            He says NZ currently has 40 businesses of a certain type (HIGH value work); that if we had another 80 of them, that alone would catch us up to Australia economically. NZ’s export earnings have been substantially contributed to by “unsung hero” small but high value manufacturing businesses. He points out that while we all “assume” certain things about the economy and our future, (eg farming and tourism will keep us up with the first world) what is happening in real life without us even noticing, is completely different.

            “Samsung Electronics”, based in Korea, is way ahead of the NZ average of “value per job”, with a workforce almost as big.

    • So the answer is if you want to keep your farm and dont want to have a housing bubble then either
      a) Dont poke demand by increasing population
      b)Bring about an attitudinal change towards high rise housing, with apartments being as spacious as houses

    • This is a widely held view and I think it really justifies a new article to deal with it.
      The land is often described as prime farming land and it is thought to be be bad to use food land as shelter land because food is more important than shelter.
      Why not dedicate the land for water collection because water is more important than food? A human can survive longer without food than without water.
      Also the land was previously used by Aborigines for kangaroo hunting. Perhaps we should return this prime kangaroo hunting land to its previous use?
      In fact food can easily be grown on less arable land. I don’t see many people offering to move onto desert so that a farmer can make his tomatoes more comfortable. Previous generations did not do that, why should today’s young?
      I suggest that UE writes an article on the topic some day.

    • G’day Novice. I don’t necessarily have an issue with preserving precious agricultural or environmentally sensitive land from development provided it is done on an objective basis and after a rigorous cost-benefit analysis. What I do hate is when governments draw arbitrary growth boundaries around Australia’s cities and preclude development outside of these limits. This has happened in all of Australia’s major housing market via the imposition of urban growth boundaries (sometimes refered to as “urban footprints”).

      In Melbourne, low quality flat rural land to the north and west, which would be ideal for development but is useless for productive farming, has been placed off-limits to development. As a result, we now have the perverse situation where many home buyers in search of affordable housing are jumping the UGB and settling in far flung exurban towns well beyond the growth boundary (e.g. Gisborne, Warriggal, Drouin, Wallan, Bacchuss Marsh, etc). A similar situation has developed in Adelaide with Mt Barker. The imposition of an urban growth boundary is neither sensible from an economic, social or environmental perspective and leads to outcomes that run counter to the goals of urban containment persued by Australia’s state governments.

      If I had my way, there would be a positive presumption that all land is available for development, with the government only allowed to deem land off-limits after proper judicial processes have been followed and strict criteria met (e.g. independent decision-making board, rigorous cost-benefit analysis, formal consultation, studies and submissions, possible compensation to affected land owners, etc).

      The same arguments apply to zoning and other regulatory constraints on land/housing supply. For example, abandoning the growth boundary would likely be ineffective if there was still insufficient zoned land.

      • +1. Either have some kind of formal urban population density control within the urban growth boundary or have no urban growth boundary at all.
        .
        Our state governments tend to concentrate all public amenities inside the capital cities and then restrict its growth!! I guess this is a result of the incumbent urban home owners and developers having greater control over the government mandate and policy, by virtue of their voting block and donations respectively.
        .
        I have little hope of seeing this status-quo change, unless and until we have a major house price crash.

  2. Did anyone see Pascoe and others on Sunrise this morning trying to “ease the minds” of the Australian public.

    It was disgusting TV.

  3. Dent then followed-up on Monday with some more warnings that Australia’s housing market was headed for a crash due to the combination of population ageing and the sovereign debt crisis developing in Europe and beyond:

    I wonder if Dent is being misquoted in the press. A fall in prices driven in large part by demographics is never going to be a crash — which I and presumably others would take to mean a fast fall. As the charts show a demographic led fall will be a slow and steady decline.

    Now to hedge by bets with a qualifier 🙂 — if geared punters finally realize that they are not going to get capital gains then there could be a rush for the exits at some point.

  4. The population ages and people die. Again, guys like Dent make comparisons to countries like Japan whic failed to replenish it’s population because of it’s failure to implement migration. Countries such as Italy and Germany also are uncomfortable with migration and are suffering an inability to replace their populations which will affect economic output.
    Australia is not adverse to turning on the people tap when needed. In a mere ten years Indians have become the largest ethnic group in Melbourne surpassing the Italians from the 60s who are aging rapidly. Chinese are also arriving in huge numbers, and when the govt feels the fearful rumblings of a propertied middle class the tap will be twisted so hard you’ll see the immigration minister walking around with his hand in plaster.

    • Actually, you need to think carefully about this. You’re right about Japan’s appalling demographics. However, the Greater Tokyo area houses more people that the entire Australian population (to quantify that: approx 35 million people in an area of 13,500 square km). Within Greater Tokyo, there is immigration: people wish to live in the more desirable areas. How is that any different from people moving to Australia for a better lifestyle? And if they’re moving to Australia to better their economic lot, why would they be in any position to support some of the highest high prices on the planet?

      Back to the Japanese:
      1.) Culturally, Japanese have always bought property with the view that it doesn’t owe them anything besides a place to live and to support the family lifestyle. That changed in the late 80s bubble. Now attitudes have swung the other way.

      2.) High-rise apartment style living is a post-WWII phenomenon. Actually, Japan has a lower population density than the U.K.

  5. Anyway, what is this “local library” of which you speak. I thought we didn’t need libraries anymore because everything was available on the Internet? 😉

  6. Leith
    Are you able to incorporate into your analysis the impact of foreign buyers, since they would not be captured in the ABS age cohorts?
    I am not knowledgable about the rules faced by foreign buyers, however I have heard comments that they are contributing significantly to demand in certain parts of the Australian market.

  7. I have subscriped for two years. as an investor this has cost me big time. But if you spruke somthing long enough you may be right, even if you miss the crash and the up turn you may get the next one best of luck. Cant Recommend
    Think there may be somthing to his property theroy though.

  8. Great article Leith.

    I note in your population by age cohort graph that the composition of 15-24 year olds (blue line) appears to grow substantially through to 2035, yet this cohort doesn’t appear to apply pressure to a growing 25-34 year old cohort?

    Is this due to the increase in natural birthrate or some other demographic quirk?

    Or is the change on the other side of 2035?

      • Hi Leith, saw a programme the other night on tv where a lady quoted a figure that 1 in 3 18year olds are growing up in a household that does not have a both parents at home, i.e. 1 in 3 are/will grow into a single parent family by the time they are 18 years old.

        How this dynamic plays out over time and its effects on household formation and commitment is yet to be acknowledged.

  9. Dent makes some interesting observations, however I’m not entirely convinced by the rationalisation of his argument -60% decrease base on demographics.

    I do believe though that we are in a bubble of sorts and that it would only take a rise in unemployment or a credit squeeze to see the housing cards tumble.I can only hope that I’m cashed up enough to take full advantage of it when it occurs!!!!

    I’m keeping an eye on China… in my opinion aust is uncomfortably leveraged to china’s economic well being.

    • “I’m keeping an eye on China… in my opinion aust is uncomfortably leveraged to china’s economic well being.”

      We are more than that – The Treasury, RBA and MSM economists have us “All in” on China. I like you am afraid that we have forgotten the lessons learnt from the energy and resources booms of the 1970’s and early 80’s

  10. Given we have a much larger population needing accomodation now than when the baby boomers were accumulating their assets any sell done will be insignificant. Dent is trying to sell a book – best done with publicity!

  11. Your library is obviously better than mine! I went to buy his book on Amazon last year and it was sold out! Forgot to go back.

    He makes a compelling argument which I agree with. I don’t think he would be able to factor in the unpredictable way that governments might react in these scenarios. We’ve seen long and hard how government meddling in the market creates havoc.

  12. “Although Harry Dent’s prediction that the Australian housing market will crash is somewhat hysterical, his analysis of the impacts of population ageing on the economy and asset prices is ground-breaking and deserves your attention.”

    Seruiously……..Harry Dent?

    Let me give everyone here some background.

    – In his book “The Roaring 2000’s” released in 1999 Dent predicted the Dow would hit 44,000 by 2008. In this book he raved about the NASDAQ. What happened there? Oh, it lost 90% of it’s value.

    – In 2004/05 he published “The Next Great Bubble Boom: How to Profit from the Greatest Boom in History:2006-2010”
    How did we go from 2006-2010?? He had a revised forecast in this period of Dow being 40,000 in 2009. Again he was only about 30,000 off the mark.

    – He once started a mutual fund bearing his name, basinvesting based on demographic trends. It woefully underperformed the market, and was predictably re-branded and his name was dropped.

    This guy has made hundreds and hundreds of predictions, ofcoure a few have been right. His work has obvious merit, BUT he doesn not deserve any attention……it’s best to ignore him, even though i hope his prediction this time comes true.

    • Forgive me if the subject of accurate crisis predictions has been well and truly aired on here before, but this is worth noting.

      FRED FOLDVARY’s “The Business Cycle: A Georgist-Austrian Synthesis.” was published in an academic journal in October 1997. The detail of his predictions is amazingly close to the chronology of the bubble which began 2 years later.

      Foldvary said that expansions in money and credit fuel malinvestments in higher-order capital goods and speculative cycles in real estate
      and land. He takes land values and real-estate trends to be particularly telling indicators of unsustainable booms and impending busts. He applies the ideas to the historical studies of U.S. cycles, building on the idea of real-estate cycles by Homer Hoyt (1933).
      From Foldvary’s final paragraph:

      “The 18-year cycle in the US and similar cycles in other countries gives
      the Geo-Austrian cycle theory predictive power: the next major bust, 18
      years after the 1990 downturn, will be around 2008, if there is no major
      interruption such as a global war. The Geo-Austrian synthesis provides
      a research agenda that can test historical cases in more detail. Much
      work needs to be done on empirical studies linking the money supply,
      real estate markets, and business cycle……”

      FRED HARRISON, in a book called “The Chaos Makers”, published in 1997, contributed “The Dreamers, the Deceived, and the Coming Housing Crash”.

      Harrison declared that “the property boom of 2000 will come as a shock to Gordon Brown; who, if he is still presiding in Britain’s Treasury in the first decade of the millennium, will… be politically traumatised by the astronomical unearned gains from land that will be pocketed by shrewd operators who know how to manipulate the tax system.” Harrison stated further that: “the consequence is predictable. By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market equal to what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of collapse that will presage the global depression of 2010. The two events will not be coincidental: the peak in land prices not merely signalling the looming recession but being the primary cause of it.”

      Two guys named “Fred”. Well done. Can anyone find a better bunch of predictions?

      To those who claim “fluke”; these guys describe the actual mechanisms of a housing market price bubble far better than some of the “flukers” years later. Mostly the “Austrian” guys are the best at predicting an economic crash, but almost all of them are just as hopeless as the rest on real estate economics. Fred Foldvary is especially formidable because he understands both – both Austrian economics AND real estate economics.

  13. There is an infinite number of possible paths to a 30% decline in real house prices over the next 40 years. Only one of them is a straight line.

    My money isn’t on the straight line.

    • Heh, nicely put. These things always overshoot in both directions. It is is usually up the stairs and down the shaft when it comes to the movement as well.

      Of course the magic getting it right is in the timing.

  14. Someone above asked about the issue of “preserving farmland”.
    The pragmatic answer is this.
    The output of an urban economy in dollar terms, is literally dozens of times higher per unit of land taken up, than the output of a rural economy.
    There might be strategic justification for some countries to preserve enough farmland to feed their own population – so what does Japan do – invade other countries? But there is no pragmatic or economic justification for a substantial exporter of primary products, to “preserve farmland” and in the process, drive up the price of land in its urban economy (including the cost of housing the workforce which ultimately is a labour cost input) and help put automotive product and whiteware manufacturers out of business. And nations that “preserve farmland” in this way, DO kill off their international industrial base – look at Britain.
    International GDP has grown about fourfold in six decades. Six decades ago, total rural GDP was roughly equal to total “urban” GDP. All the “growth” has occurred in the world’s “urban” GDP. Rural output has increased but prices have declined. While we often read of “rising prices” for primary products, these have for six decades been falling as a trend, the rises have been temporary and slight when compared to the trend.
    IF it WAS ever truly ECONOMICALLY worthwhile to “preserve farmland” rather than convert it to “urban” use, then the price of farmland on the free market would be higher than the NET (unimproved) price that developed urban land was already selling for. But food would have to be dozens or even hundreds of times more expensive than it now is.

    • If we a truly worried about preserving farmland, our efforts should be directed at dealing with our chronic issues with salination, and loss of topsoil, rather than worrying about a few extra paddocks being turned into houses near our cities.

      I think I’ve mentioned on another article here, but I suspect a lot of farmland goes out of production close to our cities, due to being hoarded in anticipation of rezoning, or used as ‘lifestyle’ blocks. You can see them on google maps. Take the reward for speculation away I imagine many of them would go back to be cheap enough to be farmed.

      The other thing to do of course, is remove most of the planning restriction in inner suburbs and allow more urban infill development to happen so there is less need to expand outwards.

  15. Dent’s 60% drop?- hyper-hysterical indeed.

    I am absolutely sick and tired of these US mega shows flying in with their magical insights and cures. I don’t know why we even give them column space.

    Give a bit of credit to our home-grown Governor of the RBA. Our situation is totally different to the US. Our mortgagees tend to have a solid debt to equity ratio, we don’t have walk-away mortgages, we have reasonably adequate lending standards for home loans, our housing stock distribution is totally different from the US- (nearly everyone wants to be in 5 cities), we have strong immigration (of many well-to-do people), the Australian Government has the fiscal wherewithal to never let a 60% drop occur etc etc..

    If Australia were ever to have a 60 per cent downturn in housing prices, I would hate to see the dire condition of people in the rest of the world.

    Giving Dent generous column space here is catering to fringe doom commentary and is unworthy, no matter how often UE distances himself from it.

    • You can attack Dent’s housing predictions and list dozens of reasons why Australia is different to the US (some valid, some not). But the fact remains that Dent’s demographic insights are worthy of exploration and analysis. I make no apologies for this.

      • My opinion that is giving airspace to a minus 60% projection on housing prices is a waste of readers’ limited time, and given the projection’s raging divergence from respected Australian economic commentary, also a bit of a cultural cringe.

        The best that I can say for Dent’s prediction is that it falls within the realm of what is not logically impossible.

          • Your point is fair enough, UE

            I do get a bit touchy about seeing any of these international mega-marketers getting a free kick. Something about “don’t encourage ’em”.

          • “If everyone is thinking alike, then somebody isn’t thinking.” – General George S. Patton

            Some people drink deeply from the fountain of knowledge. Others just gargle.
            Grant M. Bright British-Born American Engineer

            Or as an old bushie mate of mine is fond of saying: You can’t put brains into monuments.

      • I agree. Saw Dent on Sky News Richo program, he made some compelling arguments re demographic change in developed economies and impact on property, particularly that ageing Baby Boomers would be looking to sell down investment properties, likely to be conservative consumers into the future in an effort to preserve retirement wealth and not expected to return to active participation in the housing market. He linked all these to argue his view of continued suppression of retail growth, housing asset price growth, etc. Perhaps most interesting of all, he stressed the need to be out of equities entirely, stating that if you were still in equities at year end, you risked losing a lot of money! Apart from that, I had never heard of him before, property not being my thing, still I thought his views were interesting enough.

    • Is it doom? Funnily enough many people – much more than you expect would like to see this crash in house prices to occur.

      Doom and gloom is all a matter of perspective – it all depends on where you have financially positioned yourself. For Australia yes a doom and gloom situation would be a deflationary crash. Think though if we didn’t have all the household debt to our name – most people would then consider it a good thing.

    • Why is a 60% drop impossible?

      I can easily see such a drop over a 20 year period – not a fast crash but a long and slow melt.

      And I’d say a 60% drop in real prices is very possible.

      • I have been watching parts of the north west coast of the US for property since 2008 and prices there in many area have dropped 50% and are still falling.

        60% is not out of the game at all. Indeed the higher and longer you fly, the further and harder you fall.

        It is really just a matter of when. Whilst the music is playing you have to dance, just make darn sure you are near a chair when it stops.

          • Exactly. We are not talking about run down and declining cities here.

            Places where you need weapons and a hummer to collect the rent.

            These are clean and desirable places to live with many employment options etc, and house prices are still falling.

  16. Graeme Harrison (prof at-symbol post.harvard.edu)

    Harry’s genuine in his beliefs, but can overstate a concept he is promoting.

    I think the demographic changes will affect the ratio of buyers to renters, but as others have said, changes over decades do not lead to ‘collapses’, but just slight changes in compound growth rates.

    Yes, Harry’s been off on a few other forecasts, but generally there has been truth to the concepts he’s helped raise to the wider public.

    During 1977-9, Harry and I sat a few metres apart in the same ‘Section’ of our year in the MBA program at Harvard Business School, and we debated frequently. He’s a good guy, but still, he’s promoting a book at present.

    That said, I’ve been buying foreclosures in the USA.. which have 9x higher yields than Australian residential property.

    • “….That said, I’ve been buying foreclosures in the USA.. which have 9x higher yields than Australian residential property…..”

      In the right places, of course. I recall Gary North writing a column 2 or 3 years ago about a client of his that sold his home in California and bought 8 in Atlanta, Georgia – and retired.