Doom, gloom, or boom?


After economic forecaster Harry Dent’s widely publicised bleak forecast of a downturn, Kanishko Das talks to HLA Group director Andrew Hutchinson on the reality of the Australian real-estate

Australia has sound economic fundamentals, strong employment and disposable incomes and rigorous lending criteria which safeguards against oversupply and defaults

American economic forecaster Harry Dent, in recent weeks has created a storm of sorts, predicting a second wave of economic downturn to hit the world economy sometime from early to middle of next year. This has created a wave of panic amongst investors looking to put their money into the ever-safe Australian real-estate market. Many are now thinking twice especially considering how the property market has slowed down in recent months.

Mr. Dent on his part believes, “Starting in Europe, the downturn will spread to the US, China and eventually Australia.” He also went on to say that property values in Australia would fall to late 1990s to early 2000s levels. Mr. Dent forecasts a revival of the value of the US dollar and suggested that the informed investor should sell their excess real-estate and buy assets in US dollar as he believes “Once we write down all these crazy debts, we are going to destroy a lot of dollars that were created in the boom and that makes the US dollar a lot more valuable.” This coming from a man who predicted the economic downturn of 2007-08 creates that extra element of uncertainty in the mind of the home-buyer in these gloomy times.

But to what extent are these statements really applicable in the modern Australian economy? We at Indus Age decided to quiz Andrew Hutchinson, director, HLA Group Australia Pty Ltd, about the situation at hand and we found the reality to be a stark contrast to the picture actually painted..

Q. Melbourne recently made front page news when it was voted the most livable city in the world. It is a common perception that investing in property in Australia is the safest bet. Why?

Australia, generally, is seen as something of a safe haven, as reflected by the value of the Australian Dollar. This is largely due to sound economic fundamentals such as low public debt and balance of trade surplus that sees Australia ranked by the IMF as the economy best placed to weather global economic challenges. Other safeguards in the property market such as rigorous lending criteria of banks where the majority of loans have recourse to the borrower, loan to value ratios and serviceability are closely assessed and development funding can only be procured after presales occur to an extent that 100 per cent of debt is covered to protect the market from the severity of issues as faced by the US market. Furthermore, Australia is seen as a political safe haven, particularly by buyers from parts of Asia such as Malaysia and China. The ability to secure freehold title is also attractive to these purchasers. The downside of Australia’s strong economic performance and the strength of the $AUD is that it is now more expensive for foreigners to buy Australian property and the number of sales to foreign buyers has reduced as a result.

Q. How much has the property market been helped by Australia’s favourable migration laws?

Property prices/values are ultimately determined by the forces of supply and demand. Therefore demand from migrants has a positive effect upon prices. Post GFC prices were also positively impacted by government stimulus, particularly to first time homebuyers, and also by the dramatic drop in interest rates. That said, the major effect of migration is upon demand for rental properties. Nationally, the vacancy rate is 1.8 per cent according to published figures against a widely regarded “equilibrium” of 3 per cent, which is a level at which renters can comfortably find a property to rent and property owners can find a tenant without long periods of vacancy. Migration has in fact exacerbated a shortage of rental property resulting in long queues of renters unable to find property.

Q. Migration laws have already been tightened, and are set to get tighter. How will that affect the real-estate market?

A reduction in migration will probably result in a shortening of queues for rental properties. In areas where the vacancy rate is higher than the national average — such as Melbourne where it sits at 2.8 per cent, still historically low and below the equilibrium level — the effect may be a little more obvious but we do not foresee a dramatic impact. There may be some downward pressure on prices but more likely a slower sales rate per month. New projects may come to the market at a slower rate. It is my understanding that net migration will fall from about 170,000 to around 130,000. I should point out I am an advocate of higher migration as it will assist this country in terms of skills and economic growth.

Q. Do you believe Harry Dent’s statements carry any weight in terms of what he predicts for the Australian property market?

Mr Dent’s advice indicates he thinks $USD is undervalued and that Australian house prices are overvalued. He might be right but how long will it take for the $USD to improve and what volatility are purchasers of $USD going to be prepared to weather? He has been reported as saying Australian house prices will fall back to 2000s levels. Whilst I agree Australian house prices are high by world standards I cannot see the mechanism by which prices can fall so dramatically. Australia has sound economic fundamentals, strong employment and disposable incomes and rigorous lending criteria which safeguards against oversupply and defaults.
Additionally, on a national basis there is an undersupply of rental property. We are a very different case to the US, and I wonder if Mr. Dent is aware of this. There is unlikely to be the levels of capital growth that have been seen over the past 10 years and the market may move sideways for some time but the falls in prices he suggests will not happen. His is a headline-grabbing prediction and there are plenty of other “experts” claiming the opposite of what he suggests, they just don’t get as much attention.

Q. How will Australia’s real-estate fare? Doom and gloom?

It is definitely not all doom and gloom. Australia’s sound economic fundamentals will fortify the real estate market. Also, there has been an expectation of interest rate rises to come and in addition there has been a drop in the rates of sale per month.

Q. What are the solutions at hand?

One, we are recognised as a strong economy, not immune, but we would be able to weather a downturn in the global economy. Let’s remember around three years ago it was predicted that there would be a 40 per cent drop in prices within the year. It just did not happen.
Also, the expectation of a rate rise is now far less prevalent whilst the expectation of a rate cut is far more prevalent, which is an important psychological shift. The residential property market has also been performing at unsustainable levels as a result of post GFC stimulus and is simply coming back to a more sustainable pace which is actually healthy for the market – it is good for purchasers and developers.

I foresee a sideways movement in the market in the short term followed by moderate growth into the future.