Carr's Call: No jobs threat to house prices

Australia’s unemployment rate may not be surging, but a rise to 6% or over is certainly the expectation. Consequently a good friend (who is bearish property) recently put it to me that this would impede the housing market and prevent any meaningful pick-up – contrary to the view I outlined last year.

It is true to say that almost every other day we see headlines in the paper of more layoffs etc. The mood, suffice to say, isn’t great. Having said that though, the unemployment rate is still low and has defied expectations, so far, for a meaningful pick-up. Indeed the unemployment rate has been trapped between 5.1% and 5.4% for nearly three years now - with little sign that this range will be broken. The ‘advocatus diaboli’ might suggest that the leading indicators of employment like ANZ’s job ads series point to a weakening job market, but, and unfortunately for analysts, this series and others like it have ceased to be good guide to the labour market (given the digital revolution etc).

I have to admit that I have mixed views on whether we should expect a housing rebound (although it is only February, and the latest data is for December). Anyway, house prices have picked up, sure, but home lending growth is weaker now than when the cash rate was 1.75% higher. Here, it is argued that rising joblessness is the key problem and it has been put to me that it will continue to be one.

This is where I would disagree with my good friend and others who proclaim this view. For a start, and as you can see in chart 1, unemployment is largely confined to young people. Unemployment rates in the 15-19 year-old age grouping are 16.7%. For the 19-24 age bracket the unemployment rate is around 8.5%. Indeed the age group 15-24 accounts for 40% of all unemployed persons. That’s a massive overrepresentation given that age group comprises about 18% of the labour force. Of particular significance, outside of these two groups, we actually see very low rates of unemployment – especially in the 35-65 year-old age grouping - with unemployment rates from 3.3% to 3.9%. That’s very low and most of that unemployment probably reflects people transitioning from one job to another – called frictional unemployment – and this unemployment is usually voluntary.

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Now I’m not going to enter into a social commentary on youth unemployment. But it is a fact that for the housing market youth unemployment doesn’t matter all that much, and the reason is simple: This age group accounts for only a very small proportion of the housing market’ about 1%, give or take. Indeed, as you can see from the chart below, about two-thirds of housing in Australia is owned by the 35-64 year-old age group.

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But it’s the marginal buyer that matters you say; what about first home buyers? It’s often argued that this segment has been the key swing factor (for new lending and purchases) over recent years and a rebound in the housing market will require a lift in this group. Moreover, it is assumed that this group is traditionally a youth market – or so it is thought.

First things first. It is true that first homebuyers have dropped out of the market and that over recent years they have been the big swing factor – the difference between solid lending growth and soft. Look at chart 3 below. It shows the proportion of new lending going to first home buyers – and it shows it at recessionary levels.

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The thing is, the grouping with the highest unemployment rates – 15-24 year-olds are actually only a very small proportion of this market as well – around 11%. First home buyers are largely accounted for by the 25-34 year-old bracket. In fact, 57% of all first homebuyers are in this group, and 35 to 44 year-olds account for another 24%. Currently, unemployment rates for both of those groups are very low – 4.9% and 3.9% respectively - and employment growth is positive for each group. There is no sign of a significant or even modest lift in unemployment rates here, and there is unlikely to be.

Why? Because the modest lift in the unemployment rate we have seen hasn’t been due to job shedding. It’s that firms are more cautious about hiring people - and this tends to hit the youth market more.

Opening the discussion to the whole market now, and not just first homebuyers, there is no sign yet of any distress in the key housing market demographic ( 35-65 year-old). As discussed, the unemployment rate is very low – sub 5% to sub 4% in many cases.

Even if the unemployment rate rises to 6% and beyond, as some suggest, there is little to no chance that this rise will impeded the recovery in housing – nor household consumption I might add. Even a national unemployment rate of 7% would imply significantly lower unemployment rates for the key housing market demographic. In fact, during the downturn of 2000-01 when the national unemployment rate was pushing 7%, this demographics’ unemployment rate peaked at only 4.9%. That’s why house prices were able to surge at annual rates of 17% or 18%.

So why aren’t they buying now with record low rates? Because first home buyers and others have had the fear of god put into them that the economy is on the verge of collapse – we’ve always had one turkey or another talking about a recession in this country every year since 2009. Moreover, I don’t think the Reserve Bank’s easing cycle has been all that helpful - on the contrary I think it has destroyed confidence. And that is the key. Confidence. As I wrote last year, this will be the key differentiating factor this year, and we are seeing confidence is lifting.

Conclusion

So to recap. My call is that any lift in the unemployment rate won’t pose any threat to the housing market.

1. Unemployment is skewed toward youth (15-24 year-olds) and they are a tiny fragment of the housing market.
2. While first home buyers are a key segment, they are older (25-44) and unemployment rates here are very low.
3. It’s a similar story for the broader market – the key demographic are 35-65 year-olds and they currently enjoy an unemployment rate of 3.7% collectively. If the national unemployment rate rises, this will largely affect youth. During the 2000-01 downturn when the national unemployment rate rose to about 7% - the unemployment rate for 35-65 year-olds only got to about 4.7%.