Australia’s economy looks set for a downturn which could genuinely hurt | Pete Wargent

We are all a product of our environment.

We are all a product of our environmentBeing British by birth and later an adopted Aussie, I’ve formed a view over the long run that capital city property investment can “work” as an effective inflation hedge provided that you fully understand and resolve to stick to a a number of basic rules.

As the population of a capital city grows new dwellings must always be constructed at today’s prices – today’s land costs and construction costs – and over time this underpins the value of landlocked suburban housing.

Although I do own some regional properties, purchased particularly after severe corrections, my experience in Britain has shown that when an economy takes a serious downturn secondary markets can at times be brutally exposed and dwelling prices can fall sharply, or in some cases, crash.

Mining Construction Boom Ends

Of course we’ve been making this very same point for a long time now.

But as all readers must surely know, Australia has been cushioned from severe economic conditions by a decade-long mining construction boom (see the soaring green line below) and we haven’t had a recession or a serious economic downturn for well over 20 years.

Construction work done

 It has long been our contention that this has led to complacency over regional and outer-suburban property prices in Australia.

In 2015 Australia’s economy finally looks set for a downturn which could genuinely hurt, with sub-trend economic growth forecast and mining construction and investment at long last set to fall…probably dramatically.

There may or may not be a full recession, but in any case interest rates do appear likely to be heading towards record lows.

Regional Unemployment Has Stalled

We have been making the point for a long time now that regional employment growth in Australia ex-Queensland has completely stalled, and this is likely to lead to problems.

The two largest states for example have added very few regional positions in aggregate for the past 7 years and none at all – zero – for well over 4 years now.

Employed total

Regional Unemployment Rates Rising

Finally this trend is beginning to show up in regional unemployment rates.

This week the ABS Detailed Labour Force data for November 2014 revealed that while capital city unemployment fell in raw terms by 0.4 percent to 5.5 percent, regional unemployment has continued to rise to 6.8 percent. 

The difference is most pronounced in New South Wales where the Greater Sydney economy is now firing on many of its cylinders.

Raw capital city unemployment rates declined in Greater Sydney, Greater Melbourne, Greater Brisbane, Greater Adelaide and Greater Perth.

However, unemployment rates once again increased in regional New South Wales, Western Australia, South Australia, Tasmania and the Northern Territory.

City country unemployment

Full Employment

If you are looking for property markets which are actually going to BOOM – by which we mean here for dwelling price charts to turn fully parabolic – then one of the factors or catalysts that we can talk about is so-termed “full employment”.

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If you have followed our UK house price indices over time you may recall that while London is consistently the long term out-performer over time (as we obviously would expect), Northern Ireland’s index ran from a base of 100.0 in 1993 to a preposterous 659.4 by 2007 – now that is an outrageous dwelling price boom.
The Northern Ireland index later “retraced” (i.e. it crashed) to ~300 and is now steadily recovering again at 346.

One of the conditions which helped to pump this self-perpetuating bubble-boom was full-employment.Full employment is the macroeconomic condition where almost all persons are willing and ableto work at the current pricing of wages and working conditions.

Everyone in Ireland who wanted a job had one and the feedback loop gradually accelerated.

When city unemployment rates fall to below 4 percent towards to ~3.5 percent this may be an indication that such a condition might exist.

Australian Capital Cities – Unemployment Rate History

When tracking back the Australian capital city unemployment figures over the last 15 years, it is small wonder that Darwin has been on such an extraordinary run, with the city experiencing effective full employment centred upon resources industries (plus financial services compliance) and the public sector for many years.

Indeed the respective property booms of Darwin (2004-2014), Perth (broadly 2003-2010) and Brisbane (a strong dwelling prices uptrend which continued in fits and starts through to around 2009) all look to be glaringly obvious when scrolling back through the data.

Capital city unemployment rates

Charts are Harder to Read From Left to Right!

However, one thing we can say about this is that everyone is a mining construction boom expert now that the investment boom set to fade into the rear view mirror!

As a resident of Darwin for a decent part of the “Top End” real estate boom, my recollection is that the general view was more along the lines of “this thing surely can’t keep going higher…can it?” rather than “hey, this is a once-in-a-century mining boom – this baby is just going to keep on running for years to come!”.

Famously my former employers Deloitte have been calling the end of the mining investment boom annually since 2003.

Similarly when the iron ore price doubled to $90/tonne, I was working in the mining industry at that time, and as far as I recall few were predicting that the price would then relatively quickly double again (although actually thinking about it there were a few copper price forecasts from market analysts and brokers which appear to have been wildly bullish in retrospect!).

Iron ore-monthly spot price

In any case a glut of commodity supply combined with weaker demand from China has seen most of Australia’s key commodity prices clobbered over recent times, with the bulk commodities of iron ore and coal hit particularly severely.

The property boom certainly now at last seems set to end for Darwin as the mining construction boom tapers.

So where else can we look?

New South Wales Unemployment

The raw monthly unemployment numbers can be volatile and are prone to jumping around a bit.

But take a look, for example, at the rolling annual unemployment chart for New South Wales smoothed for volatility.Greater Sydney’s unemployment rate is down to 5 percent and is now in an established downtrend.

Low interest rates have pushed dwelling prices sharply higher, retail trade is booming at double-digit pace and monetary policy settings are generally all too easy for the harbour city.However, in regional New South Wales unemployment is clearly trending up towards 7 percent and above.

This is partly related to the collapse in coal prices.

NSW unemployment

The paradox of economic downturns is that despite the suffering felt in some regions, a national decline in economic activity can sometimes offer spectacular opportunities in certain property markets as borrowing rates decline.

Sydney clearly does not have anything approaching full employment yet – there is still quite some slack and underemployment in the market, with the Parramatta region, the south-west and outer-western regions dragging the averages up, for example – but some of the inner regions could yet get somewhere close in 2015 and beyond pending further interest rate cuts.

Candidates include parts of Sydney’s northern beaches, the inner west, the eastern suburbs and the lower north shore where unemployment rates are already very low (although there are existing indicators of under-employment in some cases).

Unemployment rate

Looking at unemployment rates in just a few of the suburbs and regions we have invested in and suburbs that we like, it’s little wonder that Sydney property prices in these areas have been booming.

To name but a few of them: Bondi Beach (2.4 percent unemployment), Bondi Junction (2.5), Coogee-Clovelly (2.6), Double Bay-Bellevue Hill (1.6), Erskineville (2.6), Woollahra (1.6), Dover Heights (1.7), Randwick (2.3), Paddington (2.3), North Sydney (2.8), Kensington (2.8) and Pyrmont (2.7).

Generally speaking we are less keen on outer suburbs such as Penrith (12.2 percent and rising) and St, Marys (12.7 and rising), or the south coast such as Nowra (10.7) where there is considerably more land available for release and development.

And at the present time regions of mining influence such as Cessnock (11.6 percent and rising) are struggling with ascending unemployment rates – not everyone works in mining or will directly be affected by redundancies, granted, but the multiplier effect is important.

Recessionary conditions do not tend to be kind to secondary locations with high unemployment, so tread with great care.

(That’s our opinion, others do differ on this point we should note).

Queensland Unemployment

In Queensland the city versus regional trend has been far less pronounced to date, but a similar pattern is now just beginning to play out with Greater Brisbane’s unemployment rate (down to 5.8 percent in November 2014) appearing to have peaked.

On the other hand, mining job losses in particular are set to send regional unemployment significantly higher in Queensland, with the regional unemployment rate already up to 6.7 percent and rising.

We note here that by “regional Queensland” we clearly do not refer to all regions.

The Gold Coast, for example, does not have a high rate of unemployment.

Nor does Toowoomba.But there are plenty of risk areas, particularly in the coal and other mining regions.


The Queensland unemployment rates chart by region presents some handy indicators of where property investors may be interested in looking and some of those which they might look to avoid at the present time.

In such cases it is often the trend which is important rather than the absolute rate of unemployment.

Unemployment rate

Struggling Regions

There’s no need for us to overwhelm you with charts today, but the final chart below shows how unemployment risk has eased in some regions of Australia but remains far too high for comfort in a number of selected areas.

Unemployment rate by region

Outer Suburban Challenges

There are also issues facing some outer suburban capital city areas.

The latest data shows that the unemployment rates in parts of outer Adelaide are spiralling.

For example the Elizabeth now has the highest capital city unemployment in the country, increasing to an extraordinary 33.3 percent in Q3 2014, a figure which is expected to rise further in the years leading up to 2017 as GM Holden and the care manufacturing industry is shuttered.

The rate of unemployment in Davoren Park has leapt to more than 20 percent (20.1 percent and rising) as has the unemployment rate in Smithfield-Elizabeth North (24.0 and rising) and Christies Downs (20.1 and rising), while other suburbs such as Morphett Vale are well into double digit levels of unemployment.

Generally speaking such high and rising levels of unemployment are a poor and potentially risky dynamic for housing markets that are transitioning into an economic downturn.

The Wrap

Of course, unemployment rates are only one of many metrics which we look at across hundreds within our chart packs.Job employment

We do like to share a few of them here, but space does not permit a full analysis of every suburb in Australia, and in any event, general investment advice is something to be very wary of…generally speaking.

What our chart packs do show is that unemployment rates in a number of regions are far too high for comfort and increasing given that the economy is likely to slow further in 2015.

On the other hand, low (and possibly lower) interest rates may offer investors some enticing opportunities, particularly we feel, in Brisbane.

—Although this type of analysis appears to flow naturally from the keyboard like a well-oiled machine, it actually takes quite a bit of time. Therefore, please do share on social media (or wherever). Cheers!


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Pete Wargent


Pete is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

'Australia’s economy looks set for a downturn which could genuinely hurt | Pete Wargent' have 2 comments

    Pete Wargent

    December 30, 2014 Pete Wargent

    yes employment is only one metric of dozens we look at – “of course, unemployment rates are only one of many metrics which we look at across hundreds within our chart packs”

    sydney has soaring (investor) credit, low unemployment and a fairly tight rental market, so it’s been ticking a few of the boxes.



    December 30, 2014 Max Powers

    Unemployment rates and incomes are clearly important but correlation does not imply causation. The boom in property in Ireland had more to do with availability of cheap, easy money rather than some absolute level of employment. As I commented the other day on a different article, when considering the major markets (and assuming unemployment rates within a couple of standard deviations), the expansion and availability of credit is by far been the biggest factor that drives asset prices. Prices rises may well be correlated to low unemployment but its not low unemployment itself that sees prices rise (look at Germany through the 2000’s as an example of low unemployment and low/negligible price rises). Clearly, when unemployment rates are 20% (i.e. significantly divergent from the mean) that won’t bode well for that regions property prices as the income shock associated with a sharp increase in unemployment often means that current debt loads can’t be sustained and the process actually goes into reverse.

    I guess my point is that for modest upticks in unemployment, particularly in major markets, you are unlikely to see a big effect on house prices especially if any unemployment rise is met with a reduction in funding costs and provided that bank lending is not curtailed.

    However, if banks start finding it difficult to fund themselves or they have trouble with their loan books (say, related to excessive debt financing of iron ore projects not viable at $35 iron ore) and they curtail lending, then yes, even a modest increase in unemployment in a market like sydney will affect prices.


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