Circling the square: House price lift and high unemployment

By Matt Nolan 08/11/2012

On Breakfast this morning I heard the presenters querying why house price growth is so strong (5.7%pa in October) while unemployment is at a 13 year high (7.3% in September).  What is especially perplexing is that the house price growth is primarily in Auckland (with Canterbury also important – but this is due to the earthquake reducing the stock of property) so has the increase in unemployment!

How can this be?

Well I’d note a few things:

  • House price growth is strong in Auckland especially the old Auckland City.
  • Growth in rents is relatively strong in Auckland.
  • We know there has been very little building in Auckland.
  • Occupancy rates have been pushed up in recent years at a relatively rapid rate.
  • Credit growth is still slow (albeit picking up).
  • We suspect that job loses are focused in Manukau and Papakura, given the weakness in wholesale trade and manufacturing employment.
  • Although jobs have been lost, underlying “real wage” growth has been good relative to recent years – giving households with income a bit more money to spend.  Banks are competing like there is no tomorrow to give out mortgages.
  • House sales volumes relative to population are still “low” relative to history – even after rising sharply.

Now, the lift in house prices is starting to boost building activity in Auckland, as you would expect.  However, there is a significant supply shortage.  In the face of that, houses are more scarce and so we would expect prices and rents to rise.  Furthermore, there are people with jobs and with access to credit at very low interest rates who are interested in moving or changing house – while there are people with houses who are relatively unwilling to sell in the face of uncertainty and the knowledge that there are “too few houses”.

In many ways this doesn’t look like, or at least is largely not, a bubble – as borrowing and investment in housing is still so low, and so is turnover.  Instead this is an indication of the supply issue in Auckland.

This does not mean that we should expect rapid house price growth going forward, or that unemployment and house prices aren’t linked – it just tells us that there are other factors going on that explain the difference, other factors that indicate the importance of supply side constraints in the building industry.