History shows that a rise in unemployment does not lead to fall in property prices. Financial adviser and author Stuart Wemyss says the last time Australia had a recession, with unemployment above 10%, housing prices did not decrease.
“Most economists are forecasting the coronavirus pandemic will have a negative impact on property prices,” he said. “Various economists expect the median house value to fall, with most projections in the range of 10% and 30%.”
But Wemyss, a financial adviser and author of Investopoly and Rules of the Lending Game, said logic might suggest that if fewer people are employed, fewer people will be able to afford to purchase a property. In addition, newly unemployed people might be forced to sell their homes, if they are unable to make mortgage repayments. As a result, sellers outnumber buyers, and prices fall.
“However, the historic evidence does not support the notion that higher unemployment leads to a fall in property prices,” he said.
Wemyss, writing in The Australian, compared the prevailing unemployment rate between 1980 and 2017 with the subsequent three years of property growth.
“I expected to see the rolling three-year growth rate fall, as unemployment rose. However, there was no clear relationship. For example, there were historical periods where the property growth rate was falling at the same time the unemployment rate was falling, which seems illogical.
“Moreover, looking back at Australia’s last recession, property price falls preceded a rise in unemployment, not the other way around.”
Between 1990 and 1992, the last time Australian had a recession, unemployment rose from 5.85% to 11.2%. During this period, the subsequent rolling three-year annual property growth ranged between 1.1% per annum and 3.4% per annum. In other words, house prices rose moderately during that period of high unemployment.
“I think a large part of the answer lies in two factors. Firstly, we all need somewhere to live. Secondly, the housing market is close to equilibrium in terms of demand and supply. For there to be large falls in prices, there needs to be more sellers than buyers — mass selling. That can occur with other asset classes (such as shares) with limited practical consequences. However, that is more difficult to do with property. Of course, investors and holiday-home owners have the discretion to sell, but in the main, these people tend to have a stronger financial position than the average Australian.
“The important distinction that makes our current situation unique for property is caused by a contraction in supply, not a fall in demand. Normally, an economic slowdown is caused by a fall in consumer spending.
“Today, most consumers are happy to spend: the latest statistics or a visit to Bunnings will prove that! Once restrictions have been lifted, demand will likely return at a faster rate than in a demand-driven recession.
“Also, the government has initiated mechanisms to help home-owners avoid having to sell their home, including banks offering repayment pauses, JobKeeper and JobSeeker programs. These initiatives should minimise forced sales.”