House prices in Australian capital cities have been booming for the better half of the last two decades. With our capital cities expanding at lightning rates thanks to international and state migration, it seemed like the boom would never end.
The extent of our booming economy has been so incredible, it has become the norm for us in Australia. Australians aren’t really conditioned to expect stock market or real estate falls or depressions.
But like all things, what goes up must come down. As reported by The Sydney Morning Herald earlier this week:
‘Only half the properties that went to auction in Sydney and Melbourne on the weekend found buyers.
‘Australian property owners are waking up to the mother of all housing debt hangovers. That’s what happens, you see, when you go on an unprecedented credit binge, fuelled by cheap credit and loose lending standards.’
The Australian Financial Review also confirmed that our debt-fuelled housing boom was coming to an end:
‘Generally the wider market [in Sydney] has cooled with transaction numbers falling, selling periods extending and prices declining.’
‘Melbourne has eclipsed Sydney as the nation’s worst-performing capital with prices falling by about 5 per cent in recent months, according to recent analysis by investment bank Morgan Stanley.’
For years your Money Morning editors have been warning that Australia’s real estate has been looking more and more like a bubble. Only recently have mainstream economists and newspapers started to agree.
What does this mean for home owners?
This is a controversial view as it has the potential to undermine the stability of our whole nation’s economy. Our banking sector is built on a foundation of housing mortgages, and the banks make up a massive proportion of our stock market (around 30% of the ASX). However, with Australian property prices having boomed for so many years, it’s no surprise a correction is on the horizon.
Now, if the housing boom is actually over, that doesn’t mean your house is suddenly worthless. If you own your home, you can still live in it just as happily as before. But investors with too much debt, overly dependent on rising prices, may be in trouble.
The trouble is, with so much debt in the system, it could be difficult to correct or even slow down the housing bubble without triggering a full-on crash. One that could have disastrous effects for the wider economy.
Controversial — but often prophetic — economist, Harry Dent, believes that Australia is currently in the mother of all bubbles. He says:
‘Australia is now, by far, the most overvalued country in the developed world.
‘Sydney is now 42% more overvalued at median price to median income than San Francisco.’
The first stage of the housing bubble bursting
Now, if half the properties in Sydney and Melbourne didn’t manage to sell last weekend, and if we look at the falling numbers in all cities, we could be looking at the first stage of the bubble bursting. Dent pens in his newest book, Zero Hour, that ‘real estate in many countries, Australia being one of the worst, has inflated into extreme bubble territory.’
Now Dent’s predictions are not always correct, but he has a pretty impressive track record. This time, his comments may be too accurate to ignore, especially with all that’s happening in our housing market. And he’s not late to this party, either. Below is an example of the kind of charts Harry Dent has been showing on his speaking tours of Australia for years. This one is from the 2018 14th Annual Demographia International Housing Affordability Survey, which shows that our two biggest cities are amongst the most overpriced in the world.
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If Harry Dent is right, the consequences could be catastrophic for our banks, our stock market, perhaps out entire economy.
Editor, Money Weekend