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The real estate market and the stock market are connected in both broad and specific ways, and are both leading indicators of local economic activity.
Although a boost in these two sectors usually indicates an economic recovery, employment numbers and wage growth must also play a part in any well-rounded improvement.
Consumer confidence can affect both sectors in a positive way. If a person feels they have confidence in their house price going up, they may be more willing to diversify and invest in the risky assets usually associated with the stock market. This also works in the opposite direction. Rising stocks create more funds for more home buying. So the two sectors go hand in hand.
With rates on hold at record lows and some of the major banks calling for further cuts over the next 12 months, support in the property market and higher prices should continue to be a feature of this sector well into 2015.
Upside, however, may have its limitations. The housing market has risen significantly over the past two years. Investment from overseas and supply in apartments may start to peak by 2016 (especially as the Chinese economy starts to show signs of slowing).
The stock market has also benefited from these low interest rates. However, the US Federal Reserve is looking to announce rate hikes at some point in 2015; the divergence between central banks will start to play a more important role in how the local economy fares.
Capital constraints and the effects of the underperformance of sectors such as resources may start to drag the benchmark index lower. The continued fall in commodity prices will also add to this drag.
The implications for real estate agents, mortgage brokers and consumers is that a much cheaper Australian dollar and higher interest rates (compared to other developed countries) may continue to attract funds into the local property market (mainly from China). This will continue to put pressure on house prices and shut out sections of the community that may struggle to get entry to an overpriced market.
The relationship between the real estate market and the stock market has changed over the years.
Investment from overseas – particularly from the Chinese community – has shaped Australia over the past couple of years. This will continue to be the case as favourable immigration policy continues to attract this type of investment in both housing and business.
Australia’s house prices are significantly above historical norms and the International Monetary Fund continues to report this is the case. The ratio of house prices to wages is high. The Reserve Bank (more than most) has to create a sense of stability to maintain ratios.
Comparatively, Australia still has high interest rates compared with the rest of the world. Australians are also land-rich when it comes to population and size.
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