Say What Wednesday

The relationship between shares and property in Australia

Welcome to Finance and Fury’s ‘Say What Wednesday’. Today’s question is from John.

John asks, “What is the relationship (if any) between shares and property in Australia? Should we expect the broader share market to react to falling property prices?”

Great question!

Correlation – a mutual relationship or connection between two or more things

  1. That is, what are the price movements doing in relationship with one another?
    • Does property price rise and fall with shares? Or the other way around? Are they consistently moving in the same direction or in opposite directions?
  2. Correlation doesn’t mean causation!!

 

Just because things are related it doesn’t mean that they are caused by one another, for example Lisa Simpson’s rock that repels tigers.

Correlation between asset classes

The correlation between the asset classes and that factors that play into this.

Study showed that shifts in stock and property markets can lead to the emergence of an unstable linear relationship between these markets.

  • This supports that there is some causality between equity and property markets however it showed that the equity market had an influence on the property market, but not the other way around.
  • “The results also indicate that non‐linear causality tests show a strong unidirectional relationship from the stock market to the real estate market.”

asset class correlation

  1. Ranges between 0.2 to 0.8 – changes over time depending on market factors
    • Property companies – highly correlated
    • Wider market – not as correlated
    • However, the Big 4 banks make up 20-25% of the ASX and their major revenue comes from lending market – less loans = less money
  2. Is it Causal?
    • Globally not so much
    • But in Australia, yes – if property goes down, ASX may drop as well if the banks drop
    • If banks lose 30% of their value = ASX drops 7.5% = Cause a panic sale in the market
  3. Do people see property as an alternative?
    • Yes and no – people see more risk in shares
    • All comes back to confidence – Share market returns look more homogenous (moving as one)
  4. Confidence in the economy – Good for one, and good for the other
    • When people see shares go up = Gives confidence that things are good in the economy
    • This can lead to increased in house prices as people then go out and buy more property
    • Also – when companies do well, people are employed and earn more
    • When incomes and individual wealth increases through employment people can afford loans

Conclusion

  • There is no clear correlation but having both property as well as shares can help get a full diversified portfolio.

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