Is the Hong Kong labor market deteriorating?

Analyst says a drop in property prices often coincides with an upturn in the unemployment rate.

DBS Group Research said:

Inflation and unemployment data for Dec11 is on tap this week. Inflation measured by the CPI will likely hold steady at 5.7%, rounding up the annual rate at 5.2% in 2011. Food and housing inflation will remain the key contributors. Mainland vegetable on-year price increase in December has accelerated from November, signaling food inflation is likely to remain above 8% as Hong Kong imports more than 90% of vegetables from the mainland.

Housing CPI inflation, mainly comprised of residential rents, will remain elevated even though property prices have been correcting since July. The turning point for private rentals usually comes about a quarter after the property price peak as contracts are renewed periodically.

Indeed, according to Centaline Property, private rentals began falling by 0.5% MoM in October, and a further 2.0% MoM in November. As it takes three to six months before the fall in rentals can be captured in the housing component of the CPI, the overall headline CPI will likely remain elevated above 4.5% for 1Q12.

Empirically, falling property prices also signal imminent deterioration of the labor market. A drop in property prices often coincides with an upturn in the unemployment rate. The unemployment rate is projected to be flat at 3.4% in the three months ended December, but will start creeping up to 3.7% by the end of 1Q12.