A controversial US economist has predicted prices in Sydney and Melbourne could drop by 30 to 50 per cent in the next five years as part of a global real estate downturn.
Demographer and best-selling author Harry Dent told Residential Property Managers' sister publication Smart Property Investment that rising demographic pressures and falling commodity prices could burst the real estate “bubble” in major Australian cities.
“Your market is bubbling. It’s exactly as expensive as California, when our bubble burst,” Mr Dent said.
In his view, high demand and limited supply in large Australian cities are driving up prices to a point where young people can no longer afford to buy.
“Almost all residential real estate is bought between the ages of 21 and 42,” he said.
“When those people cannot afford to buy because prices are 10 times income, then real estate starts going down.”
In his book The Demographic Cliff, Mr Dent suggested many Western countries, including the United States and parts of Western Europe, are likely to see a dramatic down-turn in their property prices as the large baby boom generation retires.
“The problem this time around is that in most countries, and Australia is one of the few exceptions, the next generation is actually smaller than the baby boom,” he said.
“Their workforce is slowing, their spending slows, their real estate slows.”
In his view, a high migration rate was likely to ease these demographic pressures in Australia.
Instead, he predicted a faltering Chinese economy would cause the Australian market to crash.
“It takes a trigger. It’s not going to demographics here, it’s going to be resources prices continuing to go down,” he said.
“China slows, exports slow and then they buy less commodities and that hurts Australia.”
“How is real estate going to keep going up in these big cities when the strongest corporations and banks are being hit?” he said.
He also warned that migration into Australia was likely to fall if economic conditions weaken.
“The people don’t want immigrants when there are no jobs and the immigrants don’t want to take the risk in a bad economy,” he said.
If his predictions come to pass, Sydney, Melbourne and Perth are likely to be hit hardest, with less impact on Adelaide and Brisbane.
“Bubbles tend to go back to where they started and that’s a long way down for Sydney and Melbourne,” he said.
Despite the doom and gloom, he suggested a depressed market could present opportunities for savvy investors.
“If you have cash and cash flow, you can buy real estate at unbelievable bargains,” he said.
In these circumstances, he urged investors to consider buying starter homes attracting first-time buyers or vacation homes for ageing baby boomers.
“The worst sector right now is the high-end trade-up sector, the McMansions, the expensive condos or expensive houses,” he said.