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Why the housing crash might not be as bad as expected

A housing crash might not be the most likely outcome with the ABS reporting today that the unemployment rate held steady at 5% throughout October.

If most of Australia remains employed then the housing plunges we saw during the GFC in the US and Europe are unlikely to happen in Australia, much to the relief of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and government officials.

The ABS revealed that total employment increased by 32,800 with full-time employment growing by 42,300 but part time employment decreased by 9,500.

Whilst the total number of unemployed increased by 4,600 the key unemployment rate remained steady at 5% and the participation rate increased by 0.1% to 65.6%.

What does this mean?

It means that the Australian economy will continue to remain in good shape. As long as Australia’s employment rate remains high there should be a much smaller chance of a recession.

The lower the unemployment rate the higher chance there is of decent wage growth with employers having to offer higher wages to attract and keep employees. Indeed, in the September quarter wage growth was 0.6% – an annualised rate of 2.4%.

There are some market participants that the believe a housing collapse is fear mongering.

The AFR quoted People’s Choice Credit Union management as saying that it had a more optimistic outlook on the Australian property market than many others based on solid economic growth, low interest rates and high levels of migration.

The credit union is predicting that house price movements will be marginally negative to flat over three years. That seems like a fairly optimistic expectation considering how much house prices fell last month and also the still-low auction clearance rates. Perhaps they are expecting price growth again in a year or two.

Although the Australian economy continues to remain strong, I’m wary of businesses that have a heavy affiliation to the housing market like National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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