Financial experts utilise several rates to determine the health of the economy, one of which is the rate of unemployment. Typically, the lower the unemployment rate, the stronger the country’s economy. Local unemployment rates can also affect the local economy, including property prices. Smart investors take into account the unemployment rates of an area because this ultimately flows through to the property prices.
Supply and Demand
Supply and demand is one of the central facets of economics, and it plays a significant role in the housing market. The more people who are unemployed, the fewer who can afford to buy houses, which drives down demand and increases the home values. However, if too many people are unemployed, then the property market will suffer as a whole. This is especially true if they are forced to sell, increasing the supply on the market.
Foreclosure rates
When unemployment rates get too high, then you will see an increase in foreclosure rates. When people are out of a job and struggling to find a new one, they no longer can afford to pay their mortgage, and may eventually default on their loans. This leads to foreclosure, and when an area has too many foreclosed properties the market value declines. Alternatively, when the unemployment rates improve, leading to fewer foreclosures, property values begin to go back up.
Local unemployment rates
Although the state and national unemployment rates affect the economy of the entire country, the most important rates to assess are the ones demonstrating the health of the local economy. When a particular area experiences economic difficulties, then it will impact that area’s property value. For example, if a major company closes down in a town, leaving most of the town’s population out of work, then the real estate market will suffer, just as the other aspects of the city’s economy. Conversely, if a new business comes to town, reducing the unemployment rates and increasing the job market, then it will attract people to the area. This creates more demand for the property, thereby raising the property values. This can also work for suburbs or districts in a larger city. Lower unemployment rates also can be a sign of gentrification or even of an up-and-coming area perfect for investment.
Although unemployment rates do not have a direct influence on property value, they share a close relationship. You cannot rely upon unemployment rates alone to gauge whether or not property values will increase or decrease, since it is part of the larger economic picture provided by other indicators, including the market fluctuations. However, you can use it to help you determine whether or not there will be the demand for property in the area, which can lead to a higher market value for real estate, making it ripe for investment.
How do things look around Australia?
You can see from the below table that unemployment rate is lowest in Northern Territory and the ACT and highest in South Australia. Western Australia is sitting at 5.6%.
Unemployment Rates by State and Territory, January 2015 (15+) (%)
|
Labour Force Region |
Unemployment Rate |
|
Northern Territory |
3.7 |
|
Australian Capital Territory |
4.5 |
|
Western Australia |
5.6 |
|
New South Wales |
6.3 |
|
Queensland |
6.5 |
|
Victoria |
6.6 |
|
Tasmania |
6.6 |
|
South Australia |
7.3 |
Source: Australian Government Department of Employment
The unemployment trend in WA
Below is a graph showing the trend in unemployment rate in WA and Australia and you can see that the rate has slowly been increasing since mid-2012. Our Perth property market started to trend backwards in April of 2013 (see below trend in number for sale in Perth), so this would suggest that the unemployment rate is a good predictive indicator to keep watch of.
