While watching for the first signs of 'green shoots' in the UK economy, along come the latest unemployment figures to deal a body blow to the hopeful...
Victims of a recession
The latest unemployment figures show that unemployment rose by 281,000 between March and May, reaching 2.38 million. This is the biggest three-month rise in joblessness since records began in 1971. The unemployment rate rose to 7.6% of the workforce, or one worker in every thirteen, which is at its highest level since January 1997.
Most forecasters expect unemployment to peak at 3 million to 3.2 million, or about one in ten of the active workforce. However, this is not expected to happen until mid- to late 2010, so the human cost of the recession and banking collapse looks set to continue for another year.
Young adults are suffering more than most, with the unemployment rate among the under-25s hitting 17.3%, or more than one in six young workers. Even worse, around 600,000 school-leavers and university graduates are about to flood onto the job market.
With job vacancies falling to 429,000 in June, their lowest level since 2001, many young people will struggle with the first step of the employment ladder...
What about house prices?
Economists believe that unemployment is a 'lagging indicator', which means that it usually continues to rise for while after the economy turns a corner and returns to growth. Nevertheless, the recent large jump in joblessness makes me worried any recovery could be weak and short-lived.
Recently, I read this wise quote: "True financial security is a reliable income." This made me think about the impact that unemployment has on our great British obsession: house prices. Put simply, people don't buy houses when they are out of work or fear for their jobs. Likewise, they avoid over-stretching themselves when their wages have reduced, for example, from lost overtime or bonuses.
Thus, we assume that rising unemployment is bad news for house prices, but is this always the case?
The patterns of the past
Let's look at the strong trends in unemployment over the past 25 years or so.
As we know, the late Eighties housing boom went hand-in-hand with a strong rise in unemployment. Indeed, unemployment peaked at 3.37 million in the first quarter of 1986, before more than halving to 1.63 million by the end of 1989 -- a drop of 52%.
You don't need to be a historian to know what happened to house prices over these four years. According to the Halifax, they soared by almost three-quarters, with the average house price rising from £35,647 to £61,495 (up 73%). Thus, the 'Yuppie years' saw rising employment and sharply rising house prices.
Of course, after the boom came the bust. Between the start of 1990 and the end of 1993, unemployment rose from 1.67 million to 2.78 million, rising by two-thirds (67%). During the same period, house prices fell by almost a seventh (14%). So, when unemployment took off, house prices slid.
Random or related?
As Nassim Nicholas Taleb warns in his excellent book Fooled by Randomness, there is a strong tendency among humans to see patterns in random data. In other words, we are often guilty of 'imprinting' -- looking for trends which support our deeply held beliefs.
One way around this weakness is to compare two sets of data (such as unemployment and house prices) mathematically. The 'correlation coefficient' of two variables measures how closely they rise or fall together, in terms of their strength and direction.
A correlation coefficient of +1 shows that two sets of data are perfectly correlated. In other words, they rise or fall together at exactly the same rate. In contrast, a correlation coefficient of -1 means that two sets of data are perfectly negatively correlated. This means that they move in lockstep, heading in opposite directions at the same rate.
To find the correlation coefficient we need, I compared the quarterly unemployment data from the Office for National Statistics with house-price data from Nationwide BS, over the past 26 years.
The result: one goes up, the other goes down
According to my nifty spreadsheet, the correlation coefficient in my example was -0.81.
In other words, when unemployment rose, house prices dropped 81% of the time, and vice versa. This is quite a strongly negative relationship.
Alas, what this calculation doesn't tell us is whether this is a causal relationship. In other words, we can't claim that falling house prices cause higher unemployment, nor the other way around. After all, both could be the result of another factor, such as rising or falling economic growth, and there may well be no direct link between the two.
Then again, as I said earlier, unemployment is a lagging indicator: it takes time for joblessness to hit consumer confidence and, ultimately, house prices. Introducing an 18-month time lag between the two sets of data increased the correlation coefficient to -0.84, producing an even stronger association.
In summary
If unemployment does rise from today's 2.38 million to as much as 3.2 million, as forecasters predict, then I suspect that this spells bad news for house prices.
Indeed, I don't expect to see any sustained increase in house prices until unemployment peaks and starts to fall. This could happen in the second half of 2010, but I'd be mightily surprised if we saw any lasting recovery in property prices before then.
In short, while we may see a few upwards blips in the monthly house-price data, don't expect a true dawn for house prices in 2009...
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