Will stock market volatility cause property prices to fall?
Friday, February 16, 2018/
How will the current volatility in the stock market cause our property markets to crash?
You’d have to be living under a rock not to have heard that the global stock markets have recently experienced some of their biggest falls in a long time.
It started with the Dow Jones in the US, which fell the largest amount by volume in history last week and this was followed by stock markets across Europe.
Not wanting to be left behind, the Australian stock market joined the rout.
On the face of it, our property markets look a lot calmer than the rugged ups and downs of the share markets, but the sizeable fall in share prices have prompted many to ask: how will the stock market gyrations affect our property markets?
So, let’s look at this with a Q&A
Why did the stock market plunge?
The first thing to understand is this correction was not caused by any important economic news or any significant change in the fundamentals in the US.
Instead, fear brewed over the prospect of rising interest rates on the back of rising inflation and jobs growth in America.
Then many suggest it was computer-programmed trading that sent Wall Street into its spin.
It’s easy to forget that these declines followed huge gains in share prices over the last year.
However, the underlying fundamentals of the wider economy, and more specifically many of the companies that saw a significant sell off, remain sound.
Why did stock prices drop so much?
The simple answer is that share prices are far more volatile than property prices because shares are more liquid.
While it’s not normal for the value of the total share market to fall by 5% in a day, it’s not that unusual to see that type of fluctuation in the price of individual shares.
In fact, the price of a particular stock can easily double within a year, or lose a significant portion of its value overnight.
On the other hand, property doesn’t have that kind of volatility, for at least a few reasons.
Lack of liquidity
While you can sell your shares at the press of a button on your keyboard, it can take months to get cash out if you sell a property.
While you may be able to get funds a little quicker by refinancing your properties, even this takes time to organise.
I know some see this relative lack of liquidity as an issue, however, I would argue that it is one of the virtues of property as an investment vehicle.
Because the only way for an investment to achieve liquidity is to relinquish some of its stability. If it is liquid (easily sold, like shares) it is more likely to have wide, more volatile fluctuations in value.
Values aren’t so clear
While you can look at your smartphone and tell the current price of any share at a glance, (fortunately) we don’t have a real-time consensus about what a specific property is worth.
Even if a couple of properties sell in your suburb at a lower level than the owners wanted, it will take time for that information to be factored in and start to affect the expectations of other buyers and sellers.
Property owners don’t sell up so easily
It’s really hard to panic property owners into selling their properties.
When they see the value of their shares falling, many investors could (but probably shouldn’t) sell up before the share price falls further.
On the other hand, with property, even if you panicked today because of bad news in the media, it would take at least a couple of months for the sale to actually happen.
And again, even more time for that information to be factored into the market.
Of course, there is no reason for the average property owner to sell if property values slump — why should they? Where would they move and why should they sell at a loss?
Remember, 70% of properties are owned by owner-occupiers and around half of these don’t have a mortgage.
The property investment market is the only investment market dominated by non-investors and that adds to its stability.
What will this do to property values?
The answer really depends on what happens next to share prices and if mums and dads panic, lose their confidence and sit back and wait to see what transpires.
Remember the factor that led to this stock market correction was the anticipation of higher interest rates in the US.
If this eventuates, and it most likely will, unless the RBA lifts local rates, it will push up the Australian dollar — something the RBA doesn’t want to see.
And higher local interest rates will have a stifling effect on our property markets
But remember the fundamentals of Australia’s economy are still sound — nothing has really changed.
In the past share market crashes have been good for the Australian property market as it has led to a flight to quality ¯ investors gravitated back to property — an investment they felt confident in.
Is property a better investment than shares?
If I had the choice, and I do, I’ll take stability (lack of big swings in price) over liquidity every time.
Over the last decade we’ve been troubled by a number of world economic crises, experienced both high and low interest rates, had a mining boom and then a bust, and we’ve governed by so many prime ministers that I’ve lost count.
And during those last 10 years the properties in my real estate portfolio have more than doubled in value but have been relatively illiquid — it would have taken time to sell up.
However, over the same period, the value of many shares that were very liquid decreased in value while overall the stock market hasn’t risen to the same extent that property values have.
I will stick with property any day.