I almost called this article things that go pop! But I resisted the urge. To see why, you will need to read this article to the very end.
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I almost collapsed when I saw the latest Corelogic real estate price data for the Illawarra.
House prices increased almost 2.5 per cent in August. That's right, in one month alone. Sound small? It's massive!
Compare it to how much you are making in interest on your bank account. I bet it's something less than one percent PER YEAR, and closer to zero.
lllawarra real estate prices have increased 20 per cent in 2021, probably the most rapid acceleration in prices that we have seen over an eight-month period in 30 years.
lllawarra real estate prices have increased 20 per cent in 2021, probably the most rapid acceleration in prices that we have seen over an eight-month period in 30 years.
And they have increased 34 per cent since the start of last year.
So prices are showing no signs of moderating - in fact we are maintaining a 2.5 per cent monthly increase. Quite staggering.
Does this mean we are in the middle of a speculative bubble? Well, let's clear up what we mean by a speculative bubble.
About eight years ago, I brought a Nobel Laureate out to Australia by the name of Vernon Smith. Vernon is an economist who has run copious experiments and written many books on price bubbles.
He says that they are difficult to identify, but typically they are massive price rises that cannot be explained by any rational underlying economic factors.
Let's have a closer look at the Illawarra. House prices have increased 20 per cent since the start of the year.
The types of economic factors that could explain increases are more people wanting to buy houses or existing people earning more money wanting to buy houses.
So things like migration, income growth, unemployment falls and interest rate falls are the typical thing we think about.
So let's just think about all that.
Can migration increases since the start of the year explain what we are seeing happening to Illawarra real estate prices?
Obviously not - our borders have been shut for 18 months.
What about income growth? Not a chance - incomes have been particularly weak over the past decade. Employment? No way - we are in the middle of a lockdown, and unemployment is escalating.
What about interest rates? No - they have been rock bottom for years, and nothing has changed in the last six months.
I have also heard a story frequently peddled that people are selling off Sydney real estate and rushing to the Gong. That's why Gong prices are so strong.
Well, that's not going to explain what we are seeing either, because Sydney real estate prices have been rocketing up as well.
In the year to date, the Sydney real estate prices have increased by 20 per cent - exactly the same amount as the Illawarra. So is Sydney in the midst of a bubble as well?
What is driving real estate prices?
Well, according to the logic of the bubble guys, if you cannot explain price rises with rational economic factors, it must be exuberance that's driving prices and we must be in the middle of a price bubble.
This naturally leads to a horrifying question: when will the bubble "pop"?
Before we get ahead of ourselves, let's look back beyond the last 18 months and try and make sense of what's going on.
In the middle of 2017 - four years ago - the Australian Prudential Regulation Authority (APRA) put restrictions on lending to investors.
Around that time, the market started coming off. In fact, real estate prices in the Illawarra fell roughly 12 per cent from the middle of 2017 to the middle of 2019 - roughly when the restrictions were eased.
Prices were hit hard. The same thing happened to prices in Sydney
In fact, since the middle of 2019, when prices bottomed out, it took prices until roughly the beginning of this year to return to normal relative to where they were before they started diving (in June 2017).
Of course, they have kept rising since, but let's get a perspective on this.
Over the last 10 years, house prices for the Illawarra and Sydney have increased by 9.5 per cent per year - in both Sydney and the Illawarra.
It's very strong growth - but not what I would call irrational exuberance, and possible to explain with the usual economic factors - migration over the last 10 years, declines in unemployment and lowering of interest rates.
So what's the bottom line here? Are we in the grip of a real estate price bubble? No, I don't think so.
- Alex Frino is Professor of Economics and Deputy Vice-Chancellor (Global Strategy) at the University of Wollongong.