The last 2 posts have focused on demand side factors that influence house prices. https://proprateanalyst.wordpress.com/. In this post we shall look at the employment and the impact on house prices. Most interesting would be whether the rate of recovery on employment helps sustain house price growth. The most recent employment report highlighted an increase of 184K jobs, but mostly part /temporary jobs. This may indicate the employers are not yet confident about the strength of the recovery.
Examining the level of spare capacity in the economy can help determine the demand for labour by employers. Chart 1 below highlights the relationship between GDP growth and UK OECD output gap. The output gap data is as per OECD measurement. OECD output gap attempts to measure the difference between actual GDP and potential GDP. The difference is expressed as percentage of potential GDP. The OECD defines potential GDP “is the level of output that an economy can produce at a constant inflation rate. “ The output gap can be a proxy measure for business cycle and capacity utilisation rate.
Chart 1 Output Gap and GDP
It shows that despite robust recovery in the GDP growth, the output gap is still well below the full potential of the economy; highlighting low utilisation rates. Noteworthy, is that GDP growth typically leads recovery in output gap.
Chart 2 shows the relationship between growth in employment and output gap. Interestingly the fall in employment levels in the 1991-92 economic downturn was much steeper than the current cycle. Conversely, the decline in the OECD UK output gap was more severe in for 2008 recession when compared to the early 1990’s.
Chart 2 Employment and UK Output Gap
However, the recent growth in employment levels was dominated by growth in temporary and part-time hiring as opposed to fulltime hire.
Chart 3 shows that the ebb and flows in house price inflation usually leads the ebbs and flows in growth in employment. Real house price growth in the early 1990’s recession bottomed a whole year before that of employment growth. However, sustained employment growth is necessary to maintain momentum in house prices.
Chart 3 House Price and Employment
Employment growth is coincident with output gap as measured by the OECD, but lags house prices.
However, employment growth is necessary to provide impetus in house price growth. Current recovery in employment is mainly due to temporary and part-time employment. The next post will examine the relationship between the temporary employment and house prices.