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