Harry S. Dent | Thursday, November 15, 2012 >>
In the last year I have done two tours in Australia, I’ve spoken in Vancouver twice and just recently I was in Toronto to speak at the Money Show there.
What struck me is that Canadians and Australians have three things in common:
1) Neither country had a housing crash or banking crisis in late 2008…
2) Both countries have small populations with abundant natural resources, making them strong commodity exporters, and…
3) Neither thinks their housing markets will go down.
Ha! If I had a nickel for every time I heard someone say their housing won’t go down…
Just guess which cities in the developed world have the most overvalued real estate markets right now?
London. Vancouver. Melbourne. Sydney.
London’s average home price is now at 12-times average income. Vancouver, Melbourne and Sydney are over 10 times. Toronto is also very high at eight-times income.
Guess where prices were in San Francisco and Los Angeles when the real estate bubble burst in the U.S.?
Ten-times average income!
And Canadians and Australians don’t think their home prices will go down?! It’s mind boggling.
Never mind the other sign the real estate bubble is about to burst…
Guess which major city has the highest rate of new condo construction…?
On the taxi ride into Toronto, in horrific traffic mind you, the things I couldn’t miss were the endless cranes, with steel and glass condos going up everywhere. All along the lake. All over downtown.
Toronto is a beautiful city, as is Vancouver. But such rapid condo development is always a sign of a bubble market in real estate.
Yet Canadians and Australians alike seem determined NOT to see the cliff they’re barreling towards. So my message today is for them and it’s simple:
Bubbles create the seeds of their own destruction.
When the young families, between the ages of 27 and 42, can no longer afford to buy their homes because prices are too high, you’ve got a problem…
There’s No Arguing Against the Inevitable
Naturally, Canadians and Australians argue that the situation is different in their countries. “We’re not like the U.S.,” is one argument. “Our banks didn’t go as nuts as U.S. banks did.”
But – and it’s a big “but” – home prices in these two countries, especially with the continued rally since 2009, have gone as high or higher in valuations than home prices in the U.S. did.
When does real estate go down?
When young families simply cannot afford it!
The New York Times had a great article months ago that showed pictures of $1 million homes in Vancouver. They were crappy little shoe boxes… homes that would be $150,000 to $200,000, at most, in a normal market.
Can you look me in the eye and tell me average households with a $50,000 annual income can afford to buy and live in million-dollar shoeboxes?
What B.S. As is their second argument that real estate prices won’t go down because their economies are stronger. “We have strong immigration trends and we’re strong resource exporters,” they say.
My answer to that:
Immigration drops like a rock in a global downturn, as it has already started to do in the U.S.
And commodity prices peaked in mid-2008. They’ve headed down again since early 2011.
China, with its own overbuilding and real estate bubble, is the biggest factor driving commodity prices… but it’s heading straight for a hard landing and commodity exporters will feel the pain when the China bubble busts.
The reality is the 29-30-year commodity cycle has peaked and it will hit Canada and Australia worse in the next global downturn between 2013 and 2014.
So, Canada and Australia, listen up: your economies are in no better position than any other in the world today. You’re as susceptible and vulnerable to the global downturn ahead as the U.S. and Europe.
Don’t Look This Gift Horse in the Mouth
My point is this: if you own any investment and commercial real estate in Canada or Australia, sell it now. Don’t wait for the inevitable crash that will ultimately happen in all major cities that have bubbled.
And remember these two simple rules: bubbles always burst and they tend to go back to where the bubble began (maybe even lower).
The global real estate bubble generally started in 2000. Use that as your reference point. Look up what your real estate was worth in January of 2000. That’s likely where it will fall back to in the coming months and years.
Can you stomach such a fall?
I couldn’t. That’s why, when I moved from Miami to Tampa in October 2005 (right at the top of the real estate bubble, by our forecasts) I convinced my wife to let us rent instead of buy. I showed her that home prices could go down 70% in Tampa if they simply fell back to 2000 prices.
So far, they’re down 50% and are likely to fall again if the economy fails in 2013 and 2014, as I am forecasting.
Don’t be a victim here just because you think real estate can’t go down.
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It’s human nature to generalize. That’s our coping mechanism. We simply can’t process the overwhelming amount of data we’re bombarded with. Sometimes this serves us well. But other times it leaves us with a dangerous blind spot.