Posted on April 18, 2009 by peter 
Filed under Australia Mortgage and Finance News · Tagged: ,

The latest Australian Bureau of Statistics employment figures released last week showed that unemployment rose to 5.7% and boy did the media have a field day, with headlines like; “The worst rise in unemployment in 18 years”.

Unfortunately unemployment will keep rising over the next year or two,; that’s what happens in a recession. So it is natural for us to ask, “How will unemployment affect the property markets?”

Interestingly, as I spoke with numerous investors over the last few weeks whilst conducting my seminars around Australia, many highlighted the fear of rising unemployment as their single greatest concern for the property markets in the near term.

My simple answer to them was – unemployment will affect different parts of our markets differently, but the good news is it probably won’t affect property as much as you fear.

Just putting things into perspective, our current unemployment rate is coming off recent historic lows. In 2001, at the start of the strong property boom that worked its way around Australia over the next few years, the unemployment rate peaked at 7.1%. In 2006 unemployment was at 5% and the 10 year average rate of unemployment is 7.2%.

In fact, most economists consider 5% unemployment to be full employment.

To help you understand this, let’s use a property analogy…

I’m sure you’ve heard that when looking at rental vacancy rates, it is said that our property markets are in equilibrium when vacancies are at about 3%. Higher vacancy rates mean that there are more properties available than there are prospective tenants, so rents don’t rise. When vacancy rates fall below 3% and there are more tenants in the market than there are properties, landlords can push up rentals.

It’s much the same with employment – there is generally considered to be full employment when the unemployment rate is 5%. In fact I remember when first learning about this years ago, many thought we’d never see the unemployment rate in Australia below 10%.

To gain a better understanding of how unemployment will affect property prices there are a number of other points we need to consider.

Firstly, just looking at a figure of say 5% or 7% unemployment isn’t enough. When examining the statistics, we need to look at the participation rate and the levels of female employment, which have risen substantially over recent months as households prepare themselves for the hard times ahead.

The current unemployment figures also reflect the influx of school leavers and graduates who can’t find work, more so than the number of workers being laid off (of course very few school leavers or graduates are home owners who would suddenly need to put their property on the market).

If you think about it, just under 30% of all Australians rent their homes and about 34% of Australians own their homes outright. This latter group are unlikely to put their properties on the market if they lose their job and while those who are unable to work or don’t have work are over-represented amongst renters, they don’t have properties to sell.

The groups that will be hardest hit by unemployment will be the 35% of households who have a mortgage and highly geared property investors.

And of course not everyone who loses their job will suddenly put their homes on the market. Many will come from double income families where both the husband and wife work. Combine this with higher household equity, lower interest rates and the measures being put into place by some of the banks who will delay payments or capitalise interest for up to a year, giving payment relief to the unemployed, and this should result in fewer forced sales and more price stability.

That’s not to say that all areas will get out of this downturn easily. Levels of unemployment will vary significantly from suburb to suburb. Some areas will feel the brunt of unemployment to a greater extent and as a result the property markets in these areas will be affected. For example, Fairfield in Sydney currently has an unemployment rate of over 15%, three times the national average while Bondi has a rate of only 3.7%.

Looking back at the past 3 downturns, rising unemployment did not necessarily cause property prices to fall. In our major urban property markets it seems that unemployment has to rise to above 10% and stay there for some time before it negatively impacts on property values.

In smaller labour markets and especially those based around a single industry, persistent unemployment rates higher than 7% start to affect property prices.

Regional communities, as well as holiday locations, are likely to be in for a bit of a shock. Some are already beginning to feel the heat, including Adelaide which appears to be struggling with relatively high unemployment figures.

Of course different industry sectors will be affected in different ways. The mining and manufacturing industries will be hit hard and areas that have an economy underpinned by these workforces are more likely to fall in value.

And unemployment is not necessarily going to be higher at the bottom end of the labour market, as many people seem to think. Many in the finance, banking and marketing industries are losing their jobs. On the other hand health, education and public service industries will have a low risk of rising unemployment and workers in these fields have more certainty around their income.

As I tend to mention regularly in these market commentaries, there are 2 worlds out there. During this recession some people are hurting, and that is terrible, but others are thriving. The gap between the rich and the average Australian is widening. If you want to thrive and not just survive in these difficult times, please check out details of my new book – Thriving not just Surviving in Changing Times. Please click this link to find out more and order your copy – stocks should be available in a week or so.

Although these statistics are dreadful for people who are unemployed (because they are not just numbers, it’s their life), the reality is if 7% or 8% of the population is not working then over 90% of our population is, and for those people nothing changes part from the fact that rising unemployment will continue to put downward pressure on interest rates…so interest rates will be lower, petrol will become cheaper and their level of disposable income will in turn be significantly boosted.

Some will go into recession mode and put off big buying decisions like a new car, or a new house or an investment property. While others will take advantage of the reduced competition and lower prices and buy that new car, upgrade their house or purchase an investment property before the next property upswing, which will surely come.

These sophisticated property investors see absolutely amazing opportunities out there right now, because the field has been cleared for them. There is much less competition and property holding costs are cheaper.

They will have the confidence to go out and buy the right type of property – one bought well below its intrinsic value, in an area with a proven record of strong capital growth and a property to which they can add value through renovations or redevelopment.

While these investors will thrive in these difficult times, others will have difficulty surviving.