Unemployment and house prices

Following on from Popping Bubble’s recent post, Australia’s low level of unemployment is often held-up as a reason why home values won’t fall. According to this argument, home values will remain supported as long as people have jobs and can continue meeting their mortgage repayment obligations.

For example, in last year’s infamous CBA investor presentation, the CBA used the below chart to argue that Australia’s “economic fundamentals”, including our low level of unemployment, “minimises the downside risk to Australia’s house prices”.

I have always been sceptical of this argument. As argued previously (most recently here), the rate of unemployment (and non-performing loans) often lags house prices. This is because when levels of debt and asset values are rising, households feel richer (the ‘wealth effect’), spurring consumer confidence, spending and employment growth. However, once asset prices stop rising (or fall in value), the process of debt feeding asset prices feeding confidence and consumer spending can shift into reverse, causing rising unemployment.

To test whether changes in employment levels in Australia are likely to lag/lead changes in housing values, I have charted changes in home prices against unemployment rates in five other nations that have recently experienced housing bubbles: the United States, the United Kingdom, Ireland, Spain and New Zealand. The results are outlined below.

United States:

Home prices in the USA peaked in June 2006 and then began falling gradually. However, unemployment continued falling, reaching a low of around 4.5% in March 2007 – 9 months after home prices peaked.


United Kingdom:

Home prices in the UK peaked in September 2007 and then began falling gradually. However, unemployment continued falling, cratering in March 2008 at 5.2% – 6 months after home values peaked.



Ireland’s home values peaked in September 2006, fell sharply over the next 3 months, and then recovered most of their value prior to continuing their descent over a 3-year period. By contrast, unemployment reached its low of 4.4% in March 2007 – 6 months after home prices peaked.


New Zealand:

NZ’s home prices peaked in November 2007 and then deflated gradually until a small rebound was experienced in mid-2009. Unemployment bottomed-out at 3.4% in December 2007 – 1 month after home prices peaked.



Spanish home prices peaked in September 2007, at the same time as unemployment cratered at 8%.



The claim that home prices will remain supported as long as unemployment remains low does not accord with the recent experience of the above nations. In three of the cases – the US, UK and Ireland – declines in home values began 6 to 9 months prior to unemployment rising. In the other two cases – NZ and Spain – the declines in home values more or less occurred simultaneously with the rises in unemployment.

Cheers Leith

[email protected]


Unconventional Economist


  1. I suggest it comes from having 20% of your employed in RE construction, sales and associated services. Chop that and it eats into retail and other services. Now you have a feed back loop.

    • Precisely. The bank fraudclosure process in the real estate and construction industries had a substantial lead time, with the businesses that were stripped of loans (mostly good ones) in 2007-2008 fighting the mess until they ran out of options. That, in turn, finally led to layoffs and closed business doors, which, in turn, led to home mortgage defaults, retail losses and the rest of the story. Playing games with financial numbers without understanding the big picture and the intended and unintended consequences is the prevalent mode at the top today.

  2. Leith,

    The biggest problem is to many banks, govt officials and Austrlaian in general are really not wanting to face the facts. The writing is right there on the wall but they just believe it is different. You know the US, UK, Ireland etc did the same thing if you peel it back and look at it. Guess its human nature.


  3. Marcelo Camelo

    Steve Keen explain this phenomenon very well. Although sentiment may play some role, a more concrete cause is the ceasing of the money creation caused by the unsustainable credit growth and beginning of the credit contraction phase, which sucks demand out of the economy and causes jobs to vanish. Thus, house prices are correlated, but do not have a causal relationship. It’s the credit expansion and contraction that causes both house prices and employment to rise and fall.

  4. lol…. and to think I try to comfort people with overpriced houses that unemployment in Australia is low.

    Leith, a small request about your charts. On the other posts in Macrobusiness, when you click on the charts a separate black window pops out in front with the image magnified. However when I click on your images, it instead opens a new tab and the image is still small. I am using Firefox.

    Could you ask the other guys how they are uploading their images to see if there isn’t some trick required?


    • Thanks for the feedback Dave. Chart magnification has been an issue for me from day one. For some reason, my charts don’t load like the others, despite clicking the correct boxed during the upload process.

      Until a fix can be worked out, you can magnify the charts by double clicking on them in the new tab, which should provide magnification.

  5. It’s the construction and real estate jobs, silly! Economic sectors react with each other like organs in a body. When one stops functioning the other areas start suffering. Instead of looking at total unemployment, look at construction/RE employment as a leading indicator of distress in the aggregate unemployment number.

    It also helps to remember that government debt (or loan guarantees) can prolong high prices and higher UE for a time. That is, if construction employment starts to come under stress, a government can relax lending rules, guarantee loans, and even directly spend, thus pumping many billions into the economy on and off the books. That keeps unemployment low but it’s an illusion because the work isn’t going towards productive activities.

    Since the US blew its wad in the first part of the decade, it would show the highest negative correlation when TSHTF; other countries have tried to keep the party going and are in even worse trouble now, like Ireland and Spain.

  6. Simple and elegant. It’s so obvious a handful of charts is all that’s needed to counter the arguments of high-paid officials.

  7. In Australia you are defined as employed if you work one hour per week. Very few people could service a mortgage on one hour a week. So I would contend that the headline data in Australia is useless – good for politicians and banks telling people how great things are here but useless for analysis.

    If the CBA really labelled those charts as USA closer to 15% to emphasize how great Australia is then it is engaging in misleading conduct. U6 unemployment, which is what they are referring to, is people who are employed part time. In Australia those same people would be declared employed (period) and aren’t we great for having low unempoyment etc. etc.

    Does anyone know what the unemployment/underemployment rate would be in Australia if part time work was added to the stats? I suppose you could calculated from some sort of ABS data on the spread of working hours.

    • Bill Mitchell does this, in his analysis.

      The ABS does reveal ‘unerployment’ somewhere as well.

      His estimates put the Australian equivalent of U6 at around 12.5%.

      Remember however, both measures do not capture people where categorisation can not count them.

      For example, an unemployed person who wants to work but who has a spouse who earns a lot won’t even bother to ring up centrelink to say they are now unemployed.

      They’ll just receive income support from their spouse while looking for work.

  8. Nice work.

    It seems to me that in RE based economies such is our, house prices are the leading indicator.
    For example, if we look at charts it seems that house prices lead interest rates. During the last decade or so interest rates were strongly correlated with house prices (Australia, UK, USA), not inversely correlated as it used to be in the past.

  9. Nice post Leith. If you inverted the axis for the unemployment line in the graphs, I reckon you would see more clearly that interesting relationship and which lags which.

  10. Hi,

    The situation in NZ was slightly different, there was a drought that led the economy into a recession before the rest of the world. I thought that this was common knowledge that NZ led the great recession???


  11. hmmm i wonder why the GST take is nose diving….its all good people are saving to buy 800k houses.

  12. Hi

    the issue I have with making such evaluation on this data is that its difficult to assume that all people become unemployed with no inkling of this happening. I would think that most people who loose their jobs have some idea that its on the cards and begin to rationalize their debts before this. So it would seem normal to me that as people become aware of the difficult situations (and possibility of one or both earners in the family loose their jobs) that they may begin selling assets to repay debts (or deleaverage).


    • Is yhereban assumption in the analysis that people aren’t aware it is happening? I can’t understand why that assumption is needed as part of the logic of the analysis…? You’ll need to expand your thoughts…

  13. The variables that drive up house prices are supply, demand and access to credit. Unemployment is only one factor of ‘access to credit’. There is no reason to believe it will have have a dominating effect on price in itself.

  14. The existence of a serious property price bubble, a consequence of urban growth constraints, has multiple effects on the economy, that HAS to cumulatively break its back somewhere along the line.

    Homeowner equity withdrawls add to debt levels as well as first home buyers, and this debt level maxxes out somewhere along the way. Meanwhile, retailers have “got used to” the debt-based demand levels, and government has got used to the artificially high levels of tax receipts. All sorts of “malinvestment” is the result.

    Central bank interest rate increases, in attempts to halt the property price bubble, kill off productive businesses long before the bubble is affected.

    Investment capital is diverted away from productive uses, into completely useless bubble “price rises on paper”.

    Businesses are also hit by rising land costs, and productivity is eroded by the high cost of the “land” factor of production. New business start-ups are hampered, and free market “creative destruction” minimised because incumbent property owners have a huge advantage over new entrants. This is “anti competitive”.

    Households and businesses are increasingly forced into INEFFICIENT locations because they simply cannot afford the more efficient locations. This is the fatal flaw in the whole urban planning conceit – more harm than good is done, even to the things the planners are INTENDING to improve, like shorter commutes.

    It is no wonder an economy turns pear-shaped eventually – the urban growth constraints make this a certainty.

  15. UK.
    HMG Actions:

    0.5% interest rates for banks only.- 28 months or so.
    QE 200 bn.
    Asset swaps with banks.
    Direct shareholding in mega-banks.
    Bank guarantees.

    A coalition government slowly considering reducing imbalances. Cuts are not reducing total nominal spending but allowing inflation to reduce debt and increase tax takes. Still our debt is rising- so more inflation or cuts will follow.

    The fall in currency is giving rising prices, food,gas etc the stuff you must have but slow export growth. Retail spending is slowing in nominal terms. The debt fuelled economy is slowing.

    Real growth needs to replace it but its hard with +50% GDP of economy being public sector (misdirection of capital).
    Larger if you consider banking public sector.

    Dont let any of them get big enough not to let fail and control the money supply.
    Consider a Norwegian Oil fund or similar after all it wont last for ever. Learn from the UK misfortune of 13 years of me me then party before country misgovernment seemingly supporting a powerful elite from losing some of their shirts.

    Luckily the bond markets have not turned on the UK, but as global interest rates rise so do the risks of outright debt deflation crushing the economy as flat as the outback quickly.

    Hyperinflation outcome not much different for average joe, but debt deflation may seem fairer to prudent risk takers.