How important is unemployment in today’s residential market?

It’s impossible to escape the reality that our employment market is in a flux. Big name employers like GMH, Toyota, Ford, Alcoa and Qantas are in the spotlight and there have been others over the last six months. Now we have a headline unemployment rate of 6%.

However we are also being told not to worry, in particular by the federal government, more rewarding jobs will be found, or in fact have to be found. We have also seen the participation rate fall as Baby Boomers in particular start to leave the workforce and it appears some may be doing so earlier than expected, with the irony that the current boom in real estate prices might be making it more appealing to ‘cash-out’ and retire early.

But despite what would usually be seen as negative news, many capital city real estate markets remain buoyant. This brings to mind a question – has the market become disengaged from employment data (at least in key markets) on the foundation of low interest rates?

Let’s consider some history

We all appreciate that the unemployment rate is influenced by a range of factors in particular the government’s policy framework for the labour market. Of possibly greater importance currently is the impact of a range of social factors like; working hours, a willingness to move locations, undertake further training or remaining in work at all.

If we look back over history we see that there was a substantial increase in the average unemployment rate from the mid to late 1970s, compared with earlier decades, between the Second World War to the mid-1970s, the unemployment rate fluctuated around a longer-term average of just 2%. This looks a remarkably low figure by comparison to now being at 6%. But there was in fact an even lower point at just 1%. Then in the period from the mid-1970s to the early 2000s, the unemployment rate fluctuated around a longer-term average of 7.5%. There was a high of 10.9% in 1992 – which makes 6% look pretty good!

While unemployment will always move around because of economic, institutional and social factors, these factors can change over time, and they change the structural rate of unemployment.  In 2014, we appear to be more accepting of a 6% rate as more ‘normal’ and not a reflection of short run or cyclical swings in economic activity. If this is the ‘normal’ then we may in reality see real estate markets less influenced by unemployment and more so by interest rates.

History also appears to repeat itself and in the mid-1970s we saw poor macroeconomic policy management, especially in the face of the first oil price shock, a much more rigid labour market and strong union influence, much higher inflation and a sharp increase in real wages relative to productivity. A lot of this sounds familiar as we move from the mineral infrastructure boom and massive period of change for manufacturing, although it is apparent that wage growth is running at less than snails pace.

Today we are looking at a reduction in employment opportunities and rising unemployment as businesses are reacting to the increased cost of labour, and a strong dollar. However, for the big picture impact on real estate markets we also need to take a closer look at interest rates, inflation and the unemployment level.  

Peter Chittenden is managing director for residential of Colliers International.