Keeping a close eye on jobs, inflation and interest rates can save you money and help plan your next property move with confidence.
Jobs, inflation, and interest rates all shape what you pay for your home regardless of whether it seems like a ‘good’ or ‘bad’ time to enter the property market.
Interest rates, how much it costs banks to borrow money and you to borrow from them, and inflation, how the value of your money changes as prices rise and fall, seem obvious things to watch. Employment and its role can be less clear.
Labour force data released last week by the Australia Bureau of Statistics confirms the unemployment rate remained at 4.1% in January, unchanged from December last year.
It’s a promising sign a first glance. Most people who want to work are currently employed.
Total employment rose by around 18,000 last month, with an increase in 50,000 full time jobs available.
A low level of unemployment – often referred to as a “strong labour market” by the RBA is risky when it comes to managing your home finances.
Firstly, it’s hard to get a clear picture of exactly how people are moving in the job market. Change happens every day, while statistics also fail to account for those who are not actively seeking work or taking a rest.
This unavoidable lack of accuracy is a major factor the bank has to contend with when forecasting, meaning it is always accounting for a wider scenario than what we would assume.
The most recent snapshot of Australia’s job market comes at a crucial time; the next set of data will reflect the time period since the Reserve Bank hiked the cash rate at the start of February in the first upwards move in over two years.
RBA governor Michele Bullock is clear the bank is focussed on employment figures. Picture: Martin Ollman
Australia’s unemployment rate is low by historical measures and confirms the economy is hot.
So why do we care again? The Reserve Bank sets the cash rate. It’s a key pillar of its job, as is employment. Often called the “dual mandate”, these are the two targets the bank is always shooting for – low and stable inflation combined with full employment in order to have price stability.
Generally speaking, the two go hand-in-hand.
“Low and stable inflation – or price stability – is a prerequisite for strong and sustainable employment growth because it creates favourable conditions for households and businesses to plan, invest and create jobs without having to worry about inflation,” governor Michele Bullock explained at an address in Sydney last year.
“When there are ups and downs in demand, inflation tends to rise as the labour market tightens, and fall as it loosens.
"So, a monetary policy response that returns inflation to target will, in time, also move the labour market towards full employment.”
The current 4.1% unemployment level in Australia is very close to what the RBA considers ‘full’ employment, meaning there aren’t a particularly high number of people looking for work compared with jobs available.
Full employment sounds like a term that means every person in Australia has a job. In economics however, that’s not the case.
The RBA is laser focused on employment data. Picture: Christian Gillies
Rather than meaning the bank aims for a scenario in which every person in the country is employed, it’s having the lowest sustainable unemployment rate while maintaining inflation that is vital.
The 4-5% sweet spot in Australia means there is no risk of businesses fighting too fiercely for workers and dramatically increasing wages, leading to higher mortgage repayments when inflation also goes up.
To prevent inflation rising to unsuitably high levels, we’re always counting on having just the right amount of people out of work at any given time. Too many people in work risks accelerating inflation, too few and the economy is stagnant.
Governor Bullock has been in the firing line recently as inflation has begun to rise again, agreeing that unemployment levels have been too low recently.
If the level stays low, the RBA may be pushed to increase rates. A May hike is already firmly on the table, with all four big banks agreeing a 0.25% increase is on the cards.
More rate hikes mean higher home loan repayments – around $80 a month for a $500,000 home loan with each rate rise.
As we move into this new year of rising inflation, keeping an eye on employment as a key indicator of where the RBA is headed can help you plan your borrowing and property decisions more effectively.
This article first appeared on Mortgage Choice and has been republished with permission.
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