Bubble Trouble – Is Harry Dent Right About Sydney Property?

Mar 11, 2014

American economist Harry S Dent Jnr threw a cat amongst the pigeons last month when he declared that the Australian property market is overpriced and that the “bubble” will burst later this year.

Dent, who was in Australia to promote his latest book, singles out Sydney and Melbourne as the most vulnerable cities, with predictions that prices will decline by at least 27 per cent in the coming years.

According to Dent, the trigger will be the collapse of the Chinese property market, as he believes foreign buyers are holding up Sydney.

2013 was one of the best years for property in a long time, with Sydney leading the charge. Spurred on by low interest rates and an improving economic outlook, buyers and sellers jumped back into the market helping lift Sydney prices by an average of 14.5 per cent (Source: RP Data).

The general consensus amongst commentators is that there will be further property price growth in 2014, although it will be at a more moderate pace. The year has started on a positive footing, with Sydney up 0.8 per cent in January (Source: RP Data).

So is Harry right that property values are about to fall off a cliff? Or has he missed the point about the Australian market and is there more room for growth?

The official view from the Reserve Bank of Australia is that there is no property bubble. A summary of the key drivers behind the property market explains their thinking:

  • Interest rates are low making borrowing more affordable.
  • Housing affordability is high with both the HIA-CommBank and REIA-Adelaide Bank affordability indexes suggesting housing affordability is at its best level in around 10 years.
  • Our banking system is sound, the number of distressed mortgages are low and household budgets are in good shape.
  • The general economic picture is good, supported by increasing stability in the US, Europe, Japan and China.
  • The supply of new property is constrained.
  • Population growth is strong.

Curtis Field, the Director of Residential Property Marketing at Colliers International, believes overseas commentators don’t understand the dynamics of the Australian property market.

“Every now and again an overseas commentator comes out and predicts the downfall of the Australian property market, but they generally miss the subtleties,” says Mr Field.

“We have strong employment, our banks are lending, interest rates are low and business confidence is on the up. Critically, there is a serious supply issue with lots of buyers chasing a relatively small number of properties. This is a long-term dynamic that causes genuine market growth.”

“Sure there will be fluctuations in value over time, that’s the nature of investing, but it’s hard to see doomsday predictions of a 40 per cent decline coming true.”

Data from the Australian Bureau of Statistics (ABS) shows that the supply of new residential properties is below long-term averages whilst population growth has been above long-term averages.

Chris Gray from buyer’s agency Empire Property says you can’t compare property markets internationally. “It’s irrelevant what’s happening overseas because 99 per cent of Australians are buying property in Australia.”

“Sometimes commentators focus too much on raw numbers without looking at the practical nature of the situation – very few Australians are going to move to New York or London just because they can buy a cheaper house,” says Mr Gray.

Overseas buyers and SMSF investors are also helping boost demand, although Curtis Field from Colliers suggests domestic buyers shouldn’t pay too much attention to the hype.

“Overseas buyers are definitely interested in the Australian market, but the impact is not as dramatic as some make out. Most developers are constrained by their banks in terms of how much stock they can sell to overseas buyers because the banks are concerned about risk. As a result, only 10 to 20 per cent of all the off-the-plan properties we sell are going to offshore buyers,” said Mr Field.

There are many micro markets within the broader market each with their own unique drivers and some will perform better than others. On the whole, however, the general consensus is that we should see continued growth in 2014.

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