Hi all.
Would just like to ask the forum what effect a major slowing of the property boom would have on the share market. I am overseas at the moment and so am just trying to save money to invest when I get back home. So I have been trying to work out where to put my savings until I get home. Have been thinking about managed/index funds but dont know what would happen when the boom slows. I can see three possible factors of the top of my head.
1. Property becomes unpopular so average investors turn back to the share market lifting it considerably. 2 A major correction in property could dramatically decrease household savings which may pull back the share market. 3 A property bust causes a economy wide recession meaning the share market drops also. These are rather conflicting ideas so I was wandering if anyone could throw in some ideas.The real trick is, not what the sharemarket as a whole is going to do, but rather what particular stocks are going to do.
For example Orica; it went quite well right throughout the recent bear phase. But from 1997 to late 2001 it was a real dog….which was a bull market.
Something will always be going well, no matter what the state of the market. Just finding them is tricky if you are not equipped.
With modern charting software, nothing moves in the sharemarket without you knowing about it.
Wayne
My (very) basic understanding of the economy is that it is a function of how much people are spending. Furthermore stock markets are a function of the economy, i.e. a thriving economy leads to a thriving stock market.
So my theory is that if/when there is an interest rate rise(s) many people won’t be able to meet budget. So you would think if budgets can’t be met spending will be reduced across the board. According to my statement above a reduction in consumer spending slows the economy and ultimatley a decline in the stock market. [
] Sounds good to me in theory anyway…So yeah save cash and/or learn how to ride the market down!
1. Property becomes unpopular so average investors turn back to the share market lifting it considerably.
Property is the passive side of the investment cycle. That is, people will pile into real estate when shares perform poorly. However, investors do not generally sell property and pile into the sharemarket because property is performing poorly.
2 A major correction in property could dramatically decrease household savings which may pull back the share market.
Property falls because the sharemarket takes off, causing interest rates to rise. Also because investors simply jump on the faster bandwagon.
3 A property bust causes a economy wide recession meaning the share market drops also.
A property bust doesnt cause a recession, but a recession does cause a property bust. Economic recovery and / or sharemarket pickup also causes property bust.
Crashy,
Must be honest, I dont really agree with your interpretation of the economics of this. I have a few problems with what you said. Please prove me wrong but at the moment I have these problems.
1.Property is the passive side of the investment cycle. That is, people will pile into real estate when shares perform poorly. However, investors do not generally sell property and pile into the sharemarket because property is performing poorly.Ok I can see where you are coming from with this one. But I do think there is something to say for what is in fashion with investments and neg gearing has definitely been in fashion over the last few years. Also probably this time lots of people may not be able to afford to keep their real estate investments if rates keep rising.
2.Property falls because the sharemarket takes off, causing interest rates to rise. Also because investors simply jump on the faster bandwagon.
I cant agree with this one at all. There are a hundred reasons why the real estate market is doomed and only one of these is the bull stock market i believe. eg over extention by households, record low yields, record low affordability etc. I guess I am saying I think the property market can crash on it’s own. I also dont think the bull stock market automatically means rising interest rates especially if property is headed south. Will explain this more in the next point. I do see your point with the faster bandwagon comment though. That has gone from tech stocks to neg gearing to….. That what you mean?
3.A property bust doesnt cause a recession, but a recession does cause a property bust. Economic recovery and / or sharemarket pickup also causes property bust.
I think you would be surprised. If you look over the last century you will be amazed how many of the recessions we have had that have been started by a drop in property. That is why property indicators are used as the main leading indicators for the economy. eg housing starts or approvals. When these drop off economists get worried about where the economy is headed. Thats why I think there is no way the RBA would raise rates if property is falling. Only if they think it needs to fall because it has gone way too far.(perhaps this time?). Yes it can work the other way. A recession can cause a real estate bust. I also think a sharemarket pickup could cause a slowing in property. Although this time it is taking a long time and I think investors might not move until property slips rather than the sharemarket inproving as it has been 6 months since the sharemarket improved and property is still booming. I guess an ec recovery could cause a property bust too although a strong economy has been one of the main reasons for the boom.
Anyway thanks for the reply and please feel free to take this apart again.
DavidA lot of economics is chicken and egg stuff, or symptom and disease……ie if A and B occur, did A cause B or did B cause A?
You know what they say, lay a million economists end to end around the world and they still wont reach a conclusion!
“2.Property falls because the sharemarket takes off, causing interest rates to rise. Also because investors simply jump on the faster bandwagon.”
I meant to say: Property falls (or stagnates)because the economy takes off, causing interest rates and the sharemarket to rise.
Is this accurate? Who knows!
] Sounds good to me in theory anyway…
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