The below graph shows how Melbourne House Prices and the S&P/ASX 200 Price Index have performed over the last 17 years.
This historical view demonstrates a few things.
Firstly, Shares and Houses tend to move in the same general direction. The correlation makes sense: both are inclined to appreciate in value in a strong economy, and flatten or depreciate in a weaker economy. A relationship clearly exists between the two, but there’s little evidence that one directly affects the other.
Secondly, Shares are naturally more volatile investments than Houses. The degree to which Share Prices rise or fall can be dramatic, with the speed of change measured in days and hours. Houses trade hands far less frequently of course, and as a result, price changes are flatter and more consistent.
Lastly, House Prices tend to recover from significant falls far quicker than Share Prices (in large part because they don’t tend to fall so dramatically in the first place). Around the time of the Global Financial Crisis, the S&P/ASX 200 Index dropped by more than 50%, and Melbourne House Prices fell by about 3%. But, whereas House Prices rebounded reasonably quickly, it took over a decade for the share market to return to its pre-GFC peak.
The pace at which things are changing right now is staggering, as COVID-19 proves to be much more than solely a health crisis.
This next graph shows how it is affecting Shares.
The S&P/ASX 200 Index peak pre-COVID was 7,139, reached on February 21, 2020; the green bars show how the Index has performed since then. The blue bars show how the Index performed in the days following the Lehman Brothers collapse in mid-September 2008.
Notice how much steeper the Index fell following COVID-19 – in just 22 days, it had fallen 37%. It took 116 days for the Index to fall that much during the GFC.
Encouragingly, the Index has improved in recent weeks, and it now sits at roughly the same relative position as it sat post-Lehman.
The two crises are very different of course, and it’s important to not compare them too closely, or to draw too many conclusions.
However, one thing is clear as we monitor government responses to COVID-19: the economy is weakening significantly. The historical relationships illustrated above suggest that Share and House prices will suffer as a result. It will likely months and even years for all three to fully recover.
