How does the stock market affect the housing market in 2020?
Once upon a time, the real estate market was widely considered to be a reliable, slow-paced, and non-volatile investment. However, all of that changed in 2008 with the collapse of Lehman Brothers and the subprime mortgage crisis. The Great Recession taught millions of us just how interlinked the global housing market is with the global stock market. Prior to this, you could easily be forgiven for thinking that the events taking place on the trading floors of Wall Street and Threadneedle Street had little bearing on the price of your mortgage.
These days, while the housing market is more resilient to the factors that led to the house price collapses we saw in 2008-2011, it is still closely connected to your stock portfolio. As we stare down the barrel of an unprecedented recession, now is the time to learn exactly how the global real estate market is affected by the stock market.
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How are things different in 2020?
First off, it is important to note that the relationship between the housing market and the stock market is very different from what it was in 2008. The crisis that precipitated the collapse on Lehman Brothers and the subsequent global recession was, in part, the result of financial institutions flogging subprime mortgages that could never be paid back, resulting in an unsustainable debt bubble. The debt bubble was fed by soaring stock markets and also helped push those stock prices upward, facilitating a vicious cycle. Financial laws and regulations have helped decouple this relationship and ensure that the mis-selling of mortgage products cannot happen on a similar scale again.
What’s more, financial traders are much more reactive than they were in 2008, thanks to new technologies that allow them to buy and sell stocks instantaneously and independently. The proliferation of stock trading platforms like eToro, where anyone can open a commission-free account and begin trading stocks immediately, has helped take some of the power away from massive, centralised institutions, reducing the chances of another subprime mortgage crisis.
Correlation or causation?
Of course, any rookie financial analyst would tell you that there is a clear correlation between stock prices and house prices to this day. However, it is more likely that correlation is the only thing at play. Interest rates might be lowered by banks that are feeling confident in the ability of borrowers to pay back their loans.
This might push up house prices as more people get mortgages, but it will also push up stock prices as investor sentiment grows. Higher levels of inflation have the effect of pushing up the value of homes and the value of stocks.
Any situation in which general consumer sentiment falls is likely to depress house prices because people are less willing to buy, but it will also depress stock prices because people are less willing to invest. In any case, the apparent connection between house prices and stocks is more about correlation than causation.
What could the future look like?
Of course, we are living in extraordinary times. The recession we are currently facing is on track to be worse than any economic contraction since the Great Depression of the 1930s. Analysts have predicted that house prices around the world will collapse in the same way that stocks did in the early months of 2020.
However, that has demonstrably not occurred. House prices in major markets such as the US and UK remain extraordinarily stable and even buoyant, with the UK seeing some of the most robust house buying activity in years.
While major US real estate markets such as New York and San Francisco have seen increased vacancies, house prices have remained stable. This is a testament to the safeguards that have been put in place since the 2008 recession, which have helped reduce the influence of financial institutions and stocks on real estate markets.
Although it is impossible to predict with certainty how real estate markets will perform in the years ahead, it looks clear that we are not going to see a repeat of 2008.
