Real Estate Prices Headed South Down Under

When I was in Australia, speaking and doing many media interviews in late 2011, I forecast that Australia would not weather the next global crisis as well as the first one…

That the Australian dollar would fall towards 80 cents from $1.08…

And that real estate had no potential to rise further and would ultimately fall, as in the U.S.

Of course, most Australian’s who heard me say this responded with: “We don’t have a bubble in real estate and it won’t burst. Not here. We have limited land for development and strong overseas demand, especially from Asia. And our banks didn’t have the subprime lending yours did. We’re different.”

On some points, I agree. Australia has limited land for development and strong overseas demand. And its banks didn’t have the subprime lending. But they DID lend at the highest valuations comparable to California, which makes the country’s overall real estate bubble greater than the one we experienced in the U.S.

Without a doubt, Australia is enjoying a real estate bubble that will burst… like every other bubble in history…

In fact, it’s exactly because Australian real estate is limited in supply that real estate prices bubbled up so much.

Here’s the thing: Australia is very much like California, with its combination of coastal cities sandwiched between oceans and deserts. Californians repeatedly told me their bubble would never burst. People in Miami said the same thing. Now they say it in New York and Vancouver.

And each time I hear it I laugh out loud. Really? You’re different?

I couldn’t disagree more.

It’s a good thing Australia does have demand from Asia because no one I interviewed with, or worked with in the media (or any basic job), owned an apartment, condo or house in Sydney… or Melbourne for that matter.

Why not? Because prices are averaging ten times income or more. That’s as high as San Francisco or L.A. before California’s bubble finally burst.

I have been right so far about the Aussie dollar falling. It hit 96 cents recently. That currency slide occurred because I was right about something else… commodity prices. I said they were overdue for a collapse, and that’s exactly what they’re doing now.

Guess what? Commodities are Australia’s Achilles’ heel.

Now it looks like real estate has become Australia’s hamstring… and it’s about to snap. Home prices across the country look like they’re peaking. They fell somewhat in 2012, then rallied back to the recent highs, and now they seem to be turning down again as they bump up against that 10-times valuation barrier.

My view is simple: We have seen the greatest real estate bubble in modern history inflate and burst. And all bubbles burst. When they do, price levels tend to go back to where they started.

Australia, just like I told Canada, just like I’ve told people in California and Miami, YOU are no different. Your real estate prices will head south… soon.

However, Australia will not see real estate prices fall as much or as quickly as we experienced in the U.S., especially if immigration remains fairly robust in the next global downturn. My forecast is that the country’s real estate will drop about 40% over the next six years.

Don’t be stupid about real estate. It doesn’t always go up, as we’ve been led to believe over our lifetimes by demographic trends that won’t be repeated. The reality is it correlates with inflation rates long term, not economic growth.

If you own any real estate in Australia, now is the perfect time to sell.

Harry

 

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About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.