Alex Frino says Illawarra real estate prices are set to increase
Original article: https://www.illawarramercury.com.au/story/6627783/uow-economist-illawarra-property-prices-heading-for-a-new-high/?fbclid=IwAR3jDMKFDei0aNQ8LvB8hptAS_clsF2xfV6JhGbWW3MOIdgF35P6SzH248E
The latest Illawarra real estate market figures just in from Corelogic paint a picture of a booming market in our region.
We now know with absolute certainty that the Illawarra real estate market last peaked in November 2017 and it bottomed-out in July last year. So the so-called "bust" in the Illawarra real estate market lasted no more than 21 months.
The damage done from peak to trough was a drop of 13%.
But let's keep this figure in perspective. The decline came after a 65 percent increase in real estate prices over the five years to November 2017. That's right, 65 percent - or around 13 percent per year over five years.
So the real estate market "bust" caused Illawarra home owners to give up only one year of gains relative to the previous five years. That is hardly something to cry poor about!
And now real Illawarra estate price increases have returned with a vengeance. Home owners may have lost 13% of the value of their property to July last year, but six months on they have already recouped seven percent.
Yes, over the last six months, real estate prices have recouped more than half the losses incurred over the previous 21 months. That's roughly one percent per month.
That makes Illawarra real estate an outstanding investment. In fact I can't think of any other asset class that has put on value at such a staggering rate over the past six months.
At this rate, the wealth of home owners in the Illawarra will reach an all- time high by about the middle of this year.
This is great news for the local economy because of the strong link between the real estate market and business activity.
Even the Reserve Bank of Australia last year came forward with an acknowledgement of this link between the property prices and consumer spending. In their statement on monetary policy last year the RBA finally admitted: "Recent developments have shown that dynamics in the housing market can have more pervasive effects than we had expected". What the? They didn't know?
It is simple, really. The wealth of most Australian households is tied up in their home. This means that if real estate prices go up, then average household wealth will go up. What do people do as they get richer? Well, they spend more of course. And this is great for business and great for the regional economy.
Yes, over the last six months, real estate prices have recouped more than half the losses incurred over the previous 21 months. That's roughly one percent per month. That makes Illawarra real estate an outstanding investment
The obvious next question is how high can the region's real estate prices go?
That's a tricky one, but we can get some guidance from Sydney house prices. Real estate prices in the state capital started falling about two to three months before they did in the Illawarra, and they started rising about two to three months earlier as well.
That is consistent with past trends which have shown that the Illawarra tends to follow real estate prices further up the road (or down the road depending on your perspective!) by about two to three months.
The good news for Illawarra home-owners is that while the peak to trough fall in real estate prices in Sydney was roughly the same as the Illawarra's, their prices have already recovered about 11 percent and show no sign of slowing down. So real estate prices in Sydney should rebound to an all-time high in the next couple of months.
In both Sydney and the Illawarra the number of houses and units sold has been trending up strongly since about January last year.
January was very quiet, as it always is, with only around 400 houses sold. But that's the biggest January that we have seen in over 15 years.
So even by this indicator, the real estate market is hot and should remain so for the immediate future.
Yes, it is clear that real estate markets are booming again. The average home-owner is getting wealthier, and business activity should bounce as a result.
Sadly, it's the young families looking to buy their first home.
Even with the property price "bust" taken into account, over the last five years - 2015 to 2019 - real estate prices have grown by 30 percent.
So a house that cost $600,000 five years ago now costs almost $200,000 more.
Sadly, over the same five years, wages have barely changed, putting home ownership further and further out of reach of many families.
Alex Frino is Professor of Economics and Deputy Vice-Chancellor (Global Strategy) at the University of Wollongong.