Locations with the biggest house price increases over the past year have also generally had the strongest employment growth, with Otago/Dunedin being a prime example. At the other end of the spectrum, both employment growth and house prices have been softer in Canterbury and Christchurch. Invercargill and Palmerston North have had comparably sluggish employment growth, but decent affordability and tight listings situations in those markets have nevertheless helped to drive up values.

CoreLogic research analyst Kelvin Davidson writes:

There’s no doubting the strength of NZ’s labour market and the latest fall in the unemployment rate to 3.9% took most people by surprise. That’s the lowest it’s been since the second quarter of 2008 (see the first chart), just prior to the GFC really taking hold. The positive picture continues when taking a 12-month view: with the level of employment 3.3% higher than the previous period. Clearly, with most people in jobs, this provides plenty of support for property. This week, we take a look at the regional labour market figures and compare them to property values.

NZ unemployment rate (Source: Statistics NZ)

Using employment growth as a measure of momentum in each region, the second chart shows just how strong the Otago region’s economy has been recently. It’s also worth noting that, aside from Waikato, the rest of the top five for employment growth are all regions without a major city, i.e. they’re “provincial” areas. At the other end of the scale, Canterbury has only experienced a small rise in employment lately, while Southland and Manawatu/Whanganui have suffered falls.

Employment growth (% 12-month moving average, Source: Statistics NZ)

These employment growth patterns help explain recent property market performance. Take Otago for example, Dunedin in particular. As the third chart shows, its average property value has risen by 10.5% over the past year, almost double the national figure of 5.4%. 

Annual % property value growth (Source: CoreLogic)

No doubt a strong labour market has been a factor behind that rise, along with other drivers such as a low level of total listings across the wider region (see the fourth chart). 

Otago listings (Source: CoreLogic)

Other areas of interest that these charts raise include Northland, Wellington, Southland, and Manawatu-Whanganui. In Northland, strong employment growth correlates well with the recent gains in property values in Whangarei. But how can we explain the strong value growth in Wellington, Invercargill and Palmerston North, despite subdued gains in employment across the wider regions? In the capital, as we wrote about here, a tight listings situation is one factor that helps to solve the puzzle.

Southland also has a low supply of property listings, which will be bolstering values in its main centre. On top of that, Invercargill’s average property values themselves are low, at just $280,275 ($400,000 less than the national average) and that better affordability gives more scope for growth than elsewhere. The same applies in Palmerston North: little property available to buy and decent affordability (average value is $413,000) will be driving growth. 

Overall, the labour market clearly isn’t the only thing that drives property values, but it’s certainly been playing a supporting role across the country. It’s slightly unfortunate for borrowers that the low unemployment rate has reduced the chances of a near-term drop in the OCR (although let’s not get greedy; some mortgage rates are already sub-4%), but it’s a job and income that really matter when it comes to servicing the mortgage and influencing the wider housing market stability. On this front, NZ is looking strong indeed.