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.
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.
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.
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