Could a share market crash cause a property price collapse?

Share markets are undergoing a rollercoaster ride and many economists believe a recession is imminent, with experts estimating a 65 per cent chance of it occurring within the next 12 months.

A mind-numbing $6.4 trillion has been wiped off global stocks in three weeks.

But even if those losses are compounded, is it likely to flow through to a property retraction or crash?

During Australia’s last major recession, back in 1990-91, property prices fell in some parts of the country. Melbourne real estate slipped 6 per cent but the country’s property pool overall proved exceptionally resilient.

Given that recession was one of the worst since the Great Depression of the early 1930s, this was quite an achievement.

Melbourne’s property prices fell and didn’t recover to 1989 levels until 1996 but its outlying poor performance came off the back of a heady 1980s boom and was seen as an inevitable correction.

Borrowers despairing at the current interest rate level would be suffering paroxysms if they were faced with the insanely high 17.5 per cent repayments confronting mortgagees back then. It was the relatively quick decline of those rates that underpinned much of the resilience of property prices through those economically challenging times.

Recessions creep up on property owners and prospective investors but how has Australia handled the sudden impact of stock market crashes that hit like a car crash?

The Global Financial Crisis of 2008-09 was a harrowing experience for those with superannuation, share portfolios and careers in finance and elsewhere.

But once again, property prices barely registered an interest in the events that caused tremors around the world. Australia in general was less impacted than the rest of the world but shares still dropped more than 10 per cent and the Aussie dollar lost 30 per cent of its value.

Property? There was minor blip in 2009 before dwelling values resumed their upwards trajectory.

 

“In large part this reflected the health of the Australian banking system,” the report noted.

“The Australian banks had almost no holdings of the ‘toxic’ securities that severely affected other global banks.

“The health of the Australian banking system facilitated the effectiveness of the monetary and fiscal response, particularly by allowing much of the large easing in monetary policy to be passed through to interest rates on loans to households and businesses, in stark contrast to the outcome in other developed economies.”

The 2024 Financial Landscape

Share markets around the world have been on a tearaway run to record levels around the world in the years since the pandemic.

Before this week’s burst of volatility, when Japan’s Nikkei Index lost 12.4 per cent of its value in a day before adding another 10 per cent the next day, and the US and Europe markets contracted very sharply, it was all buy, buy, buy.

From New York to London and Tokyo, 14 of the world’s 20 biggest stock markets had hit record highs in the past couple of months.

In the US, from where many international financial contagions have emanated, analysts had been pointing to a strong economy, moderating inflation, robust corporate profits, and trust in the Federal Reserve to buoy investor confidence and help stocks rise. However, they warned that trouble could be around the corner if any of those factors were to fall out of balance.

That factor has emerged as unemployment.

Last week’s US jobs data shocked on the downside, sparking fears of a slowdown across the world’s largest economy.

Whether this result’s impact on stock markets has just contributed to a ‘healthy correction’ or is the harbinger of more turmoil to come will be known in coming months.

Potentially expanded Middle East conflict, or even the same eventuality beyond Ukraine and deeper into Europe, China’s slowing economy and unpredictable regional sabre rattling, and the potential for a global herd reaction if another large equity sell-off was to take place could all throw a major spanner into the international economy’s often-opaque inner workings.

But as Covid proved, when Australian property was seen as a safe haven in an uncertain world, even the complete freezing of global supply chains was not enough to pull the real estate market down.

There’s little reason to believe Australian property would be too adversely affected unless an international conflict became a truly global conflagration.

When property prices did last fall in Australia, during 2017–18, it was matters closer to home that were the driver. There was no economic crisis, and property prices had been rising steadily in the years before.

Low interest rates and loose lending policy have always driven price growth more than almost any other factor.

In 2017 and 2018 low interest rates had everyone borrowing whatever they could get their hands on.

In response, lenders became very strict and APRA came down with some very hard-hitting policy changes as a result of the Financial Services Royal Commission.

When people could no longer throw wheelbarrows of money at property, prices retreated.

For now, the likelihood of property market crash is fairly remote.

Even if there is a massive stock market crash, property responds slowly to such volatile scenarios and with the current low rate of loan delinquencies few sellers would be forced to offload property and therefore add supply to the market that might lower prices.

The current imbalance between housing supply and demand that has driven prices to record levels around the country are not being addressed, population growth is still high even if migration levels are being reduced, and interest rates have stabilised.

With those parameters in play, even if stock market tremors become a fully-fledged quake property prices are unlikely to have their foundations shaken.