We're entering one of the most difficult periods in history, says global economist and writer Harry Dent Jr, and New Zealand could bear the brunt of a burst housing bubble following the economic fallout of the COVID-19 crisis.
Dent's economic predictions have been met with both scepticism and amazement over the decades. In the late 1980s, the economist forecasted that the leading Japanese economy would enter a dramatic slowdown lasting more than a decade. In the early 1990s, he claimed the Dow Jones Industrial Average (DJIA) would reach 10,000. Despite backlash and widespread disbelief, his predictions eventually proved to be true.
Speaking to The AM Show on Thursday morning, Dent claimed New Zealand's real estate bubble is perilously close to popping in the wake of the pandemic. The world is on the brink of an economic bust, and financial asset bubbles need to come "down to reality", he says.
"The times are dramatic. The greatest boom in history, now we're entering one of the most difficult times in history," Dent said.
"Housing and real estate in Australia and New Zealand are in the top end of high-priced cities in the developed world that Asian immigrants love to migrate to. The good thing about New Zealand, you have excellent demographics coming out of this, unlike most of the developed world... but you do have a real estate bubble, as does California, Hong Kong and London - that's the big danger, that your house could go down more than you think."
The housing bubble in a nutshell
For the last few decades, housing prices in New Zealand have risen considerably faster than the average income. Real estate or housing bubbles typically follow a rapid increase in the market price of property to unsustainable levels. When real estate reaches these prices, it typically excludes the average buyer and favours the wealthy, who will pay overinflated prices to get a piece of the property pie.
During an economic downturn, properties stand to lose their value. In this instance, homeowner's may have mortgages greater than the property's worth, and be in negative equity. If they need to sell, they will receive far less than the sum they initially paid.
The country's banks also stand to lose a lot of money if the housing bubble bursts. As the majority of New Zealanders are unable to get on the property ladder without taking out a mortgage, the banks are likely to foreclose if people can't make their payments.
Hence, New Zealand's banking system is very vulnerable to the country's real estate - and so is the personal net worth of most households. Back in 2012, investment manager Brian Gaynor claimed that a 10 percent drop in house prices could eliminate roughly $60 billion of New Zealanders' personal wealth.
"Now your valuations are higher than ever and you're on the cusp of China, the epicentre of this global bubble... you do see periods where bubbles like this burst, and it's a big deal," Dent told The AM Show. "China is the epicentre of this bubble, the most overvalued real estate, far more than even Auckland, Sydney or Melbourne, particularly Hong Kong. So in your part of the world, you will be the strongest to come out of it. Not only because of your demographic, but because of the demographics in India and South-East Asia, your neighbours.
"We only have in the States, for example, 28 percent of our net worth in real estate. In Australia and New Zealand, it's 65 to 67 percent - boy, that's dangerous."
V-shaped recovery 'totally unrealistic'
Dent strongly disputed the Reserve Bank and the Treasury's forecast that New Zealand will follow a 'V-shaped' recovery. Recent predictions claim that a steep rise will follow a sharp decline, allowing the country's economy to re-stabilise by the end of next year. Dent says that theory is "totally unrealistic".
"The fundamental trends are much weaker than you think because central banks have covered this over with endless money printing to make everything okay. Things are not okay. Things will be okay when real estate comes down, stock bubbles burst, we restructure a lot of debt in the world and then come out into the next global boom," Dent said.
He predicts the next global boom will fall between 2023 and 2036 - but between now and then is where things get risky.
"I'm giving people a warning. This is not just an ordinary recession. It's not about the virus - except it's the perfect trigger, because you can't stop the virus with money-printing like you can with stock crashes or recessions. This is a time for people to look at their real estate, their stocks - get as safe as you can for a few years."
The light at the end of the tunnel
The world may be entering one of the most difficult times in history - but with some financial savvy, there is money to be made at the end of the tunnel.
He notes that all booms are followed by a dramatic bust and the current economic downturn, triggered by the COVID-19 pandemic, was always inevitable. Yet there are positives involved, Dent says, citing the reset in debt and financial assets in the early 1930s following the Great Depression.
"That's a healthy thing. We came screaming out of the early '30s because we got rid of so much debt and so many bad companies and banks. It's a good thing, but it's painful," he explained.
When the dust settles, stocks and real estate can be purchased at a much cheaper price. Dent predicts the next boom could potentially propel Australia and New Zealand to two of the most favoured developed countries worldwide, alongside Norway, Sweden and Israel.
"The only way to turn it into a positive is to see it coming and get out of risky assets, especially stocks - anybody can sell stocks, they are super overvalued. Stocks are going to end up being down at least 60 percent in New Zealand and Australia... and that is not something to sit through."
And for the average person, the economic bust isn't necessarily something to fear. Dent noted that as high-end real estate is the most overvalued, with the top 1 to 20 percent of the world's wealthiest owning the majority of stocks and financial assets, it's the rich list that will be hit the hardest.
"We've had a great boom, everybody's a lot richer than they should be, if you take most of your gains here you're going to a very, very happy camper," he said.
"You can be like Joseph Kennedy, [who] sold at the top in 1929 and rebought when stocks were down as much as 80-90 percent. He went from being a mere multimillionaire to a billionaire."