Motley Fool Australia

Is property crashing into a bear market even if the ASX is on a bull run?

Bull bear

It may sound contradictory that an increasing number of analysts are predicting a sharp fall in home prices even as the S&P/ASX 200 Index (Index:^AXJO) enters a bull market.

The experts at the Commonwealth Bank of Australia (ASX: CBA) are the latest to forecast a looming bear market for the residential property sector.

Coincidentally, the ASX 200 jumped 1.3% in the last hour of trade on Friday. This takes its total gain since last month’s low to just over 21%.

A bull market is defined as a gain of 20% or more from the latest trough, while a bear market requires an equivalent drop from the latest peak.

Can shares thrive when property dives?

There’s a furious debate whether the equities bull market is a false dawn and that ASX shares are facing a second meltdown.

Some might be thinking that the dimming outlook for property is evidence that the share market is just full of bull and will collapse again.

While property and equities are two distinct asset classes that aren’t generally correlated, they both have been severely impacted by the same factor – the COVID-19 pandemic.

Rise and fall on the coronavirus curve

One big reason why shares have rebounded over the past four weeks is because of the flattening of the coronavirus curve.

Logic might indicate that either the property doomsayers or the stock market bulls will end up with egg on their face.

However, it is not only possible but probable that stocks can run higher while property tumbles. Before I explain why, it’s worth nothing what is driving CBA’s property forecast.

CBA’s bearish warning

The bank has special insight to the residential market as it’s the nation’s biggest lender. Its analysts are warning that home prices will fall by 10% over the next six months, or 20% on an annualised basis, reported the Australian Financial Review.

The painful fall will be felt most in Melbourne and Sydney, with the former tipped to take an 11% blow, while Sydney and Canberra cop a 10% drop each.

Watch the unemployment rate

The gloomy prediction is driven by the spike in unemployment as the federal government essentially shut down the economy to contain the virus outbreak.

While the Morrison government is spending an unprecedented $130 billion on its JobKeeper initiative to protect jobs, this isn’t enough to sway CBA’s bearish view on property.

CBA isn’t alone in flagging the potential bear market for our beloved housing market. Why then shouldn’t equity bulls be more worried?

Tale of two cities

This is because financial markets do not always mirror the real economy. The miserable jobs market will hinder the ability for prospective home buyers to get a loan, and this will have a more direct impact on house prices than on the share market.

This is particularly so for defensive quality stocks, such as Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW).

The big divide

But there’s another more important reason why stocks can outperform. It’s to do with the flood of money that central banks and governments are pumping into the financial system.

The wave of cheap money won’t make it easier for a newly unemployed person to get a home loan, but it will make a significant difference to the share market.

Given that the rocketing unemployment rate will take quite a bit of time to improve, the ASX is shaping up to be a better investment proposition than property for the interim.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia and Telstra Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…