If you’re a follower of real estate investments expert Jason Hartman, you’ve probably already met Harry Dent.
Dent, an investments as well as demographics expert himself, is the author of “The Sale of a Lifetime: How the Great Bubble Burst of 2017-2019 Can Make You Rich.” He recently appeared for the sixth time as a guest on Hartman’s “Creating Wealth” podcast show, and together the two men discussed how certain financial bubbles—objects that get bigger and bigger till they eventually burst—are causing chaos in certain markets.
They particularly talk about how Chinese investors buying up real estate in the United States is creating a bubble in certain, higher-end, cyclical real estate markets, such as San Francisco and Vancouver, British Columbia, and how that buying flurry will contribute to the “great bubble burst” of which Dent predicts in the years ahead.
And Hartman doesn’t limit his dissing of foreign investors to the Chinese. Having recently returned from a summer trip to Europe, he also rails against what he calls “the European mindset of conservation and scarcity” and says he’s relieved be back home in the United States.
Here’s how Hartman’s and Dent’s discussion on the issues of Chinese investments in US real estate could affect you as an investor, because of certain rising bubbles:
The Bubble From Chinese Investments in US Real Estate
Chinese investments in US real estate and other foreign real estate has ballooned since 2010, or about when the country began allowing citizens to take large amounts of money out of the country. Though China more recently has cracked down on the amount of money that its citizens can spend abroad, its investors still will spend about $1 trillion on real estate globally over the next decade, The Huffington Post recently reported.
Citing data from China’s largest real estate portal, Junwai, The Post said the amount of money Chinese investors poured into real estate worldwide surpassed $100 billion in 2016, which was an increase of more than 25 percent from 2015. It also said that Toronto and Montreal have since surpassed Vancouver as cities in which Chinese are most interested—most likely as a result of British Columbia’s introduction of a 15-percent foreign buyer’s tax in greater Vancouver last year, which was designed to stem the Chinese buying tide.
The Hartman-Dent podcast was taped before The Huffington Post’s report, so they centered much of their discussion on Vancouver and other cities where bubbles are about to burst.
“I was just surfing the Vancouver real estate market a few weeks ago, and it’s just so insane, it’s absolutely psychotic,” Hartman says in the podcast.
He saw a Vancouver house that was about 1,000 square feet in size and was priced at nearly $2.5 million—“and, it was old … I just couldn’t believe it.”
“Where I spent most of my adult life, in Irvine, Newport Beach, southern California, I thought the prices were nuts there,” Hartman says. “Vancouver is insane, and most of that is attributable to that Chinese money. It’s strange how like Chinese and Middle Eastern buyers are so willing to be so speculative. They just don’t seem to care about the fundamentals of yield, cash flow, cap rate.
“It’s all just ‘buy these properties in these trophy areas.’ It’s just nuts, I don’t get it.”
Dent, meanwhile, compared the current bubble from Chinese investments in US real estate to a similar one in the 1980s, when Japanese investors bought up foreign real estate when the value of their currency had soared. That bubble burst in the early ’90s, when the Japanese real estate and stock market prices had become too greatly inflated.
“When things go up in a bubble, you have unprecedented wealth for no good reason and then you tend to just blow it,” Dent says, citing both the former Japanese and current Chinese bubbles. As an investor from one of those countries during a bubble’s growth, he says, “You think ‘I’m a genius’ … and you buy more and more real estate at overvalued prices and you’re setting yourself up to lose.
“So the Chinese are the dumbest buyers. They’re the ones paying $100 million for an 8,000-square-foot box on Central Park in New York. This is crazy.”
Dent calls Chinese investments in Vancouver real estate the most intense of any major city that he, as a demographer, has ever measured worldwide. “They love Canada, they love Vancouver with their money.”
“They have two issues,” Hartman says. “Number one, they’ve got a potential currency arbitrage. They’ve got potential to make money in real estate, which, of course, they won’t, we just discussed that. But they also get the Brink’s truck factor. They’re basically fleeing their own government, in essence, and doing it legally by buying U.S. and Canadian real estate, right?”
“Yes, that’s it exactly, you’ve got it, that’s exactly what they’re doing,” Dent responds. “They’re laundering money out of China because they know—the smart people, the rich people in China know—it’s a top-down communist government. It’s overbuilding, over-investing, ‘over’ in debt faster than any emerging country in all of history, and the bubble’s going to go down.
“So they want to get out, ahead of it. They’re the smart money.”
When the Chinese realize “they’re screwed and they don’t have any money left,” these are the cities where the bubble will burst the worst, because they have attracted large amounts of Chinese investments: San Francisco, London, Vancouver and Singapore.
Commodities Bubble Already Burst, Stock Bubble May Be Next
Harry Dent has become a bubbles expert by studying them historically and by studying demographics. He correctly predicted the gold and commodities bubble burst that happened a few years ago.
When real estate bubbles burst, it’s typically when prices have fallen 50 to 60 percent. Stock bubbles burst when they’re 70 to 90 percent down, and commodities bubbles burst at 80 to 90 percent down, Dent has found.
“Commodities bubbles burst every 30 years, just as we saw right after 1920, after 1980 and now 2008, 2011, recently,” he says. “And stock bubbles come now every generation, especially every other one, like the 1930s and now. These things just don’t correct linearly, and they don’t build linearly, they build exponentially and they crash.”
In his book, “The Sale of a Lifetime,” Dent develops a bubble model for his readers, and he predicts that the bubble that will burst in the years ahead is the stock market.
That’s good news for Hartman followers, of course, because Hartman often calls Wall Street a scam.
Hartman and his Platinum Properties Investors Network favor investments in real estate, instead—particularly rental properties that are located in linear markets, as opposed to properties in cyclical markets
Linear markets are those whose housing prices stay steady over a period of years, while cyclical real estate markets are those that can fluctuate widely up and down in price. Cyclical markets leave investors too susceptible to heavy losses when there are sharp market downturns—as occurred in the real estate fallout of 2007 and the financial crisis of 2008.
“Stocks will crash twice as fast if the bubble builds,” Dent warns. “And you don’t measure the bubble from when the last low was, in the last bear market. You measure when the trends go exponential versus the linear trends you talk about. That’s when you say ‘this is when the bubble’s beginning,’ and bubbles tend to go back to where they start.”
When bubbles burst, economists and political experts often describe them as “a black swan,” Dent notes.
“And I’m like, ‘Oh, they’re idiots,’ this is not a black swan. Bubbles build systematically, exponentially, and then they burst even more exponentially, especially with stocks. So, we can predict that, we can say, that this stock bubble is going to burst, and it’s going to probably going to take into late 2019, early 2020, and it’s going to go back down to at least the Dow of 5500, and probably back down to 3800, 4000, where the bubble started.
“This is not guessing. This is what bubbles do if you look at them, which nobody does, because the reason people don’t understand bubbles or see them is because they don’t want them to stop. They’re getting something for nothing.”
What Should You as a Current-Day Investor Do?
Dent agrees with Hartman’s assessment that linear real estate gives an investor a decent yield in times of bubbles, even if the price of real estate goes down. “With all of the multi-dimensional aspects (of real estate), if you can make 20, 25 percent annually while everybody else is just getting creamed; relatively speaking, you’re doing OK?” Hartman asks.
“Yes, and I agree with that,” Dent says, “because the millennials, who aren’t buying, are forced to rent more now, so the rents will hold up.”
If you’re a real estate investor who buys multi-family apartments and complexes and rents them out, and do so with positive cash flow, you can buy more of them at a lower price, he says. “So that is the one good strategy I see.”
But, he adds, it’s a good strategy only in the right real estate markets—you should avoid those cyclical markets. “You can’t do that at South Beach Miami, or, let’s say, Vancouver. Can you possibly buy something and rent it out with positive cash flow when it’s so overvalued? No way.”
Investors may just want to cash out their stocks in the next year or two, Dent says, or, “if you want to take some risk,” perhaps invest in short-goal stocks or short, real estate-oriented indexes.
Otherwise, “take your chips off the table and wait for this bubble to crash,” Dent advises. Then, two to six years from now, if you want to risk your money in the stock market (against the Hartman mantra), buy back in, and, Dent says, “you will be like Joseph Kennedy in the early ’30s.”
Kennedy foresaw the 1929 stock market crash and sold all of his stocks ahead of the market’s fall. Then, in the early ’30s, “he bought everything at the bottom, 20 to 80 to 90 percent off, and that’s the way to make money in deflation,” Dent says.
Don’t Act Like a European, Hartman Tells His Investors
Before the recent podcast with Dent, Hartman had just ended what he called “the European summer of love,” a trip that took him to such countries as Latvia, Poland and Finland. Hartman actually was born in Europe and travels there often, but “I have a real love-hate relationship with my birthplace, the continent of Europe,” he says.
Citing high unemployment rates and “economic disasters” in Spain, Portugal, Greece and Italy, and “France where people don’t want to work more than 32 hours a week,” most Europeans carry “this over-entitled socialist, liberal attitude,” Hartman has observed.
The European mindset is one of scarcity and conservation, while the American mindset is one of abundance, he says.
You, as an American investor, should follow the latter route, Hartman says.
“Europeans constantly bash Americans, because we don’t have socialized health care, and I’m like, ‘Really, is that your whole thing?’ Is that your whole life’s thing, free health care? At least in the United States … and there are a lot of losers in the United States, we’ve all watched Jerry Springer … many of the people I know, they want to do something great with their life.”
“And there, the European mindset is like, ‘Well, I got to have free health care’ and ‘I have to have my big, long vacation every year,’ and ‘am I going to make 2,000 Euros a month?’ It’s just this ‘getting-by’ mindset.”
As far as Europeans worrying about conservation, Hartman adds: “Imagine if the Wright brothers when they were inventing the airplane, imagine if every step they took, they had to think about, ‘Well, conserve this, what about the environment, what about OSHA, what about all the regulations,’ all of this stuff. They would have never gotten anywhere, they would have been just so bogged down in really secondary concerns.”
As an American investor, your foremost concern is those rising bubbles of which Hartman and Dent warn, many of which are contributed to by Chinese investments in US real estate.
Says Dent: “I don’t care what the reason is for a bubble. When things start to go up exponentially, faster than the fundamental trends, which is very predictable and very trackable, you’re in a bubble. If it looks like a bubble, quacks like a bubble, walks like a bubble … it’s a bubble.”