Slumping home prices could derail Australia's jobs boom

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  • Australia has created over 300,000 jobs over the past year, with the annual growth pace actually edging higher in March.
  • Solid hiring has come despite a sharp slowdown in the economy and continued weakness in home prices.
  • The current downturn in home prices is now the largest in percentage terms since the early 1980s.
  • Where home prices move, employment growth often follows.
  • Even though unemployment still sits near eight-year lows, with inflation weak, UBS expects the RBA will cut Australia’s cash rate next week.

Australia has created plenty of jobs over the past year, some 304,700, in fact.

A substantial 289,800 of those have been full-time positions, helping to keep the unemployment rate anchored near an eight-year low of 5% despite near-record levels of labour force participation.

While annual employment growth has slowed a little from the levels seen last year, at 2.44%, the pace of hiring has actually started to accelerate again compared to what was seen in previous months.

The jobs juggernaut machine continues to purr, a result at odds with the slowdown in the economy in the second half of last year and continued weakness in the housing market.

But for how long?

According to UBS, the slump in home prices over the past year is a worrying lead indicator for employment growth over the next year.

The chart below backs up that view up.

UBS

More often than not, where home prices move, employment growth tends to follow.

If that relationship holds true on this occasion — not a guaranteed outcome by any stretch given there have been periods in the past when the two have diverged — then the era of 2%-plus annual employment growth may be numbered, increasing the risk that unemployment may soon start to trend higher.

At a time when underlying inflation sits around the lowest level on record, and moving further away from the RBA’s 2-3% medium-term target, any uptick in unemployment will trigger the two catalysts the RBA has nominated as outcomes that could warrant a lower cash rate: a sustained increase in unemployment and lack of progress in returning inflation to its target.

Even though unemployment hasn’t moved higher as yet, UBS doesn’t believe the RBA will wait to see whether that happens. Come Tuesday next week, it expects the RBA will cut Australia’s cash rate for the first time since August 2016.

“We expect [home] price falls to reach 14%, causing a negative wealth effect on consumption,” said George Tharenou, Economist at UBS.

“We think this, coupled with around record low underlying CPI and a per-capita GDP recession, compels the RBA to cut rates by 25 basis points in May and another 25 basis points in August.

Having priced in a two-in-three chance the RBA would cut rates by 25 basis points in May in the immediate aftermath of Australia’s weak Q1 inflation report, traders, according to Australian cash rate futures, have since pared the probability of a rate cut back to 44%.

However, a full 25 basis point cut is priced in by August with a second cut, taking the cash rate to 1%, also tipped by February next year.

The RBA will announce its next monetary policy decision on May 7.

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