Tuesday, July 21, 2009

Unemployment trends

We've just seen the largest quarterly jump in unemployment on record. Can house prices rise while job losses soar?

Cliff D’Arcy points out that there is some evidence of an inverse relationship between property prices and unemployment levels whilst cautioning against making incorrect conclusions. That said, unemployment forecasts are clearly bad and it's hard to see how that can support higher property prices.

Posted by quiet guy @ 09:06 AM (2223 views)
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19 thoughts on “Unemployment trends

  • Sounds pretty sensible to me.

    The relationship between unemployment and house prices will never be precise enough to be causal but correlative? Certainly.

    Rather puts the ‘green shoots for the housing market’ argument to bed.

    Without any supper.

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  • “Can house prices rise while job loses soar?”

    Highly unlikely. If they do then there will be another crash, unless of course inflation comes roaring up behind house prices and provides a floor. Just because house prices are unlikely to rise due to soaring unemployment numbers it does not necessarily mean that they will continue to fall dramatically either, unless of course job loses just keep on and on soaring, which is unlikely.
    On a related point, unemployment usually continues to rise well after an economic recovery has started.

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  • The correlation coefficient between house prices and unemployment is so strong that it would be fair to consider it a causal relationship. The time lag between the two metrics strengthens the causal argument because if they happened simultaneously it would be hard to argue that one caused the other. I recently put some metrics into a formula and came up with a magic figure of 2.75 million unemployed that would cause the HPC to accelerate. The idea behind the formula is that thus far we have just seen some froth blown off the market because only unemployment is strong enough to cause a real crash. The historical figure of 2.78 million quoted in the article is remarkably close to my 2.75 million figure. At the suggestion of Mark Wadsworth, I added some historical interest rates to the formula. I made the assumption that average mortgage rates would remain below 6.5% for the next year. The new magic number that would cause the HPC to accelerate is 2.9 million. A bit disappointing but that’s the number I will be looking for.

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  • If average mortgage rates rose to 8% then it would take 2.7 million unemployed to properly accelerate the falls

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  • refusetobuy says:

    Do you fancy sharing your magic formula?

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  • refusetobuy says:

    Sorry, forgot to say please. This internet thing seems to strip out my manners.

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  • mark wadsworth says:

    @ Flashman, thanks for update, as I said before, even if this is only a black-box Altman’s z-score type formula, that will do me, the longer the period is covers the more reliable it is.

    As RTB says, can you make this available to the general public by setting it up as a google document or emailing it to me?

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  • Flashman, if average mortgage rates rise to 8%, then most people I know who are on trackers or who will revert to variable IR’s in the next 2 years would be toast. The decline in house prices would be secured. In fact, it would be one almighty crash.

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  • I told everyone what went into the ‘formula’ in a previous post but you need a little piece of proprietary software written specifically for a ‘back testable’ charting platform, to come out with the numbers. Several years of chart data from several metrics is entered, which is why I cant give you a simple formula. The software wasn’t really designed for this purpose but with a few botches one of my colleagues got it to give out some meaningful numbers (he knows my obsession with house prices). As I said previously it’s nothing too fantastical or sophisticated – a spreadsheet could be made to give similar numbers if the metrics inputed were limited. Perhaps I could explain how this thing works….
    First you have to have a charting platform with a back testing facility. There are no charts available for housing and unemployment that are in a data format that is compatible with our platform…so you have to manually enter the data points to create some time sequenced charts. These charts are then used as historical data and that is where the the piece of ‘predictive’ software comes in. It, in effect, reverse engineers and back tests the data to produce projections.

    I think the causal relationship is so strong that this is one prediction that I am happy making. I normally shy away from predictions for reasons that I won’t bore you with now.

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  • mark wadsworth says:

    Flash, thanks, that all sounds very tricky so I’m happy taking your word for it.

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  • mark, I will put my thinking cap on and work out how to better present the thing (as per the above post I have nothing to present but the output from a non too robust black box). I am guessing that you are a whizz with an excel spreadsheet, so perhaps that would be a better way to present a house price forecast based on this causal relationship.

    I only meant it as a bit of fun and the lack of sophistication could be picked apart quite easily. Funny enough though, I still stand by the figures

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  • Thanks Flashman & Mark W for all your hard work on these numbers.

    Either way unemployment running through the 3M mark will produce a fall in property prices (unless of course banks are recapitalized by that point and cut their mortgage margins reducing the average mortgage rate further perhaps.

    Anyway, dare you guys extend your predictions to a timescale over the coming months where we hit the 3M unemployment mark and the likely subsequent further fall assuming interest/mortgage rates remain unchanged ?

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  • str 2007: long time no blog. I hope you are well? You probably remember that I am slightly sceptical on the unemployment numbers that are generally touted. It is notoriously hard to predict unemployment so I am always dubious when I see confident forecasts.

    My best guess is that we will see unemployment max out at about 2.9 million. I don’t think we will reach 3.2 million but I am not at all confident of this. The time scale is even harder but I would have thought late summer 2010 would be the approximate high tide mark

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  • Flashman
    Yes, long time no blog, I hadn’t lost the faith, was a bit tied up nearly dying from an Invasive Strep A infection if that means anything to you (a bit like the nasty Meningitus that that kills fit Students, amongst others, in a matter of a day or 2). Anyway back at home & on the mend slowly.

    You’ll be alot better on the numbers than me I guess, but taking the following paragraph from the National Statistics :-

    <>

    Implies to me that we could be heading in the 3M direction by Christmas if you add in the end of summer jobs come the end of September plus all the school leavers etc. signing on in September. And that without the forthcoming ‘financial shock/stock market crash in the Autumn some have mentioned.

    Also is there the possibility of an increase in the rate of people being made unemployed as companies who are just keeping their heads above water now hit the buffers as Government QE runs out of steam ?

    I’m sure you’ll end up being correct with your figures & timescales but if this is a Dead Cat Bounce I can’t help thinking we’ll get there sooner. Not sure if that makes me a pessimist or an optimist. Don’t wish anyone ill fortune, just want a ‘sensibly’ priced roof over my head or a patch of land for that matter & I’ll build my own.

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  • OOPS

    This was the missing paragraph :-

    The unemployment rate was 7.6 per cent for the three months to May 2009, up 0.9 over the previous quarter and up 2.4 over the year. This is the largest quarterly increase in the unemployment rate since 1981. The number of unemployed people increased by 281,000 over the quarter and by 753,000 over the year, to reach 2.38 million. This is the largest quarterly increase in the number of unemployed people since comparable records began in 1971.

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  • Str 2007: That sounds terrible. I’m pleased you’re on the mend

    My guess is no better than anyone else’s guess but there are some other factors to consider. After the 2001 mini recession, companies generally decided to staff themselves at a lower level and many never returned to their previous staffing levels. They also learned to identify less valuable employees so they could chop them quickly if they needed to. I think the first group have now been chopped and things might slow down from now. Companies are also now aware that if they cut too many staff they will harm themselves when the pick up happens. That is why they have innovated a new approach with pay freezes and reduced working hours.

    I have to stress though, that I am not confident in this analysis.

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  • Flashman
    Interesting angle, time will tell I guess.

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  • I have read Cliff D’Arcy’s articles for Motley Fool etc over a number of years and IMO the guy talks common sense.

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  • Hi, everybody, I am glad to read all your blogs, especially the regulars(MW, Flashman, Denzil),please keep them coming as it provides re-assurance when the VI’s are out there celebrating that it’s all over and the property prices are set to rise.

    @8Flashman, I now you said that you do not like providing predictions, but if you can provide a monthly update as what your black box predicts, I am sure many of us would be very grateful for this.

    This site is very useful for my sanity as at present I am unable to understand why the property demand is increasing when everything else around us is falling apart.

    I already own a home, but what I do not understand is why would a country advocate increasing the cost of an essential item unnecessarily . House prices have gone up nearly 3 times which means that it costs 3 times as much to service it. I do understand that interest costs are lower so the service cost may not be as high. I feel really sorry the young who just starting in life and they include my children in a few years time. Perhaps by then my children may enjoy lower property cost.

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