When The Ice Cream Man Loses His Job…

Posted by Luke Graham

Economics and employment are major factors within Blue Wealth’s research model. A key factor of this is the relevant unemployment rate, as unemployment can represent both qualitative and quantitative factors in a prospective investment area. One would first consider that those who are unemployed typically are not in a position to participate in the property purchasing market, which therefore has a negative effect on demand in the area. If this figure is consistently high over a period of time, the area is typically undesirable.

The finer relationship between the unemployment rate and the viability of a residential real estate investment has been debated across economists, including the ‘causality’ or ‘mutual exclusivity’ relationship and the responsiveness of one to the other. It is certain, however, that unemployment and house price increases have a negative correlation (that is, when unemployment goes up, house prices tend to go down). An ideal period to observe this phenomenon was between 1990 and 2012, when a progressive reduction in unemployment was met with significant increase in house prices over the same period.

The argument over the cause and effect relationship between unemployment and house prices can be illustrated in this manner. Beach drownings and ice cream sales are correlated, yet neither one would cause the other. The cause of both is the summer weather that prompts people to eat ice cream and swim at the beach to cool down. Ice cream sales do not cause the summer weather, but the summer weather does cause ice cream sales.

Economist Leith Van Onselen has conducted research that indicates that property price is the summer weather and unemployment is the ice cream sales. He identified that the change in housing prices preceded changes in unemployment and that this could be due to the fact that a reduction in the value of somebody’s home induces pessimism, a reduction in spending, reduced economic activity and resultant job loss for would-be service providers. Either way, it is apparent that unemployment should always remain at the top of our research checklists.

Posted by Luke Graham, on 1st Apr 2014