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Harry Dent, Special Interview Part 1
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Harry Dent, Author of The Demographic Cliff, Special Interview Part 1
In this special edition of Inside Word, Smart Property Investment talks to Harry Dent, controversial commentator and author of The Demographic Cliff about why he believes Australian house prices are about to fall by at least 30 per cent.
Stefanie Garber, Journalist, Smart Property Investment
Harry Dent, Author; The Demographic Cliff
So Harry, welcome to Smart Property Investment. Today we'd love to have a bit of a chat to you about your views, particularly your new book The Demographic Cliff. Now to start off with, you've described in your book real estate as the most demographic driven industry. Can you elaborate on that a bit? Why do you say that?
The Demographic Cliff means when a generation, a large generation especially the Baby Boomers, peaks. Their spending goes down as they save for retirement, their kids have left the nest, you have to wait for the next generation to come along and have enough momentum to drive up the economy and it usually takes about 12 - 14 years in between generation peaks before the next boom starts. The problem this time around to be brief is that most countries, Australia is one of the few exceptions, the next generation is actually smaller than the baby boom and in some countries, a lot of European countries and east Asian countries with a very low-- There is no echo [?], there is no generation to follow. Their work force is just slow. Their spending is just slow. Their real estate slows.
So you say Australia is the exception. What can we expect to see in Australia in the next 5 - 10 years then?
Well again your market is bubbling. It's exactly as expensive as California - like L.A, San Francisco, San Diego - when our bubble burst. And by the way, when the U.S bubble burst, the economy wasn't going down, it was still going up. It started bursting in early '96 and I picked it in late 2005. It's just because it got so expensive and it only burst in the areas that bubbled. The sub prime crisis in the United States pretty much centered in 4 states out of 50 - California, Arizona, Nevada and Florida. I lived in California when the bubble was building and in Miami, Florida when it finally peaked. So I know those areas. It's just like Sydney or these cities in Australia. All these cities-- Where you've got limited land for development because you've got desert and water and ocean and hills, but they're attractive areas. People are immigrating to Australia faster than the U.S or Canada. We think we're immigration magnets, you're even more. You've got a large baby boom here pressuring, so you've got this pressure on demand and limited supply in places like Sydney, that's what causes bubbles. And what people don't understand, they think "Well because of that, we'll never burst". Bubbles get driven up so high because of that combination, the young people who buy- And again I know exactly-- All the residential real estate is bought between age 27 - 41 or 42. And when those people, especially young, cannot afford to buy, it's 10x income like in San Francisco or Sydney, then the real estate starts going down and old people sitting in it lose their value. People sit in real estate, young people buy it. But that also means if we do eventually see - and I think we're going to see a 30-50% decline in the next several years in places like Sydney and Melbourne. If real estate declines, it's a big win for the young people who know can afford to buy a house at all or buy much more at less of their income, it's a big win. But the old people sitting in this are going to be hit hard. People in the United States- We has 26% of houses underwater at one point, I think we're going to end up with 40% before it's over. I don't think it's over in the United States yet and I think it's just about to start in Australia.
So in the Australian context, what can investors do to either protect themselves from that bubble crashing or even to take advantage of it?
When real estate goes down, it's the most opportune because it drives up the [?], no body can get loans. If you've got cash flow you can take over real estate, unbelievable bargains. We would just steer you if you were going to do that then buy places that can be converted into affordable starter homes for the next generation who are going to be dying to buy after not being able to afford to live in places like Sydney and Melbourne and Brisbane for so long OR can be positioned as vacation homes for Baby Boomers. I tell you if I was going to buy a vacation home from the United States in another country and I-- Because Sydney is my favourite city. I'd buy a place right down town in Sydney. Right down near that Westfield restaurant complex, that's the coolest thing I've seen in the world. So some of the aging Baby Boomers will want to be downtown in condos and townhouses closer to the action- Other ones will want to move further out for affordability and lifestyle or to a vacation retirement area. So that's where I see the opportunities in the downturn. The secret is you've got to get out of the way. You have to sell real estate that's not strategic to your life or business and you have to wait to buy until we see this crash because if you're in the bubble, once it starts you wont be able to move it.
What's a sign that the bubble has reached its lowest point? What's a sign that it's time to step in?
You know it is hard because bubbles always get bigger. You know the more our incomes go up, the more credit becomes available, every bubble in history has always been higher than the last one. So first of it it's got to be worse than the last one. In real estate, the main thing I look at is price to income and again in the best areas there's- London is 15x income, but London is only 15x income because 70% of the buyers of London downtown property are foreign. Rich people, foreign. I bet it's 50% here. It's 50% in places like San Fransisco. It foreign buyers and very wealthy people drive up so much- That every city I go to that is a great city, the people working in the city have to commute from 1 hour, 1 1/2 hours away and this is even more so in Shanghai and Mumbai and emerging countries where price, it can be 20-30x income. So I look at- When real estate gets to that 10x or more in developed countries, you're prime for a bubble burst. And that's exactly where the U.S bubble burst. That's exactly where Vancouver is in Canada - their hottest market - and that's exactly where Sydney and Melbourne are right now. That's when I say 'Watch out'. Then I look and say-- It takes a trigger, okay. It's not going to be demographics here. It's going to be resource prices continuing to go down, and they're going down, we predicted this. A vicious cycle; resource prices go down, that hurts exports in Australia. House real estate [?] going to keep going up in these big cities when the strongest corporations and banks are getting hit. Resource prices go down, emerging markets get hit - Oh that hits China because now that's their biggest customers. China's exports slow and they buy less commodities and then that hurts Australia and emerging markets. So it's a vicious cycle. I think that's what's going to trigger the crisis in Australia, not demographics. Demographics triggered it in the United States.
Okay fantastic. Thank you so much for that Harry.