Property prices often lag stock prices

Strategy: Property prices often lag stock prices

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What one investor did.

"In 1989, I shocked a lot of people in my dealing room when I suddenly sold my home in Sydney, and put my sale proceeds into Deutschmarks. It was viewed as rather bizzare. However, I was convinced that the property market would start to feel the effects of the share market crash some 18 months earlier.

I was also very keen to rent a stunning apartment overlooking Sydney Harbour. It was directly opposite the Opera House, and nearly as high as the Sydney Harbour Bridge. Despite having one of the best views in the world it wasn't exactly very expensive - amazingly only a few hundred Aussie dollars a week.

Anyway, as it turned out I was right about housing prices (and fortunately the Deutschmark, which went on to rise against the Australian dollar)."
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In general, share prices have been a good leading indicator for property prices, which often follow the direction that the stock market took two or three years earlier. The economy pushes the shares and property in generally the same direction, but with property, the reaction takes longer.



1. There are always exception to rules

Recently in 2005, however, there may have been a decoupling of the two markets, and this strategy may not have been very effective.

A few years ago, stocks were dominated by weak global economies and the tech wreck. This was followed by a persistent recovery which started after the invasion of Iraq. Housing prices on the other hand, have until recently been surging, inspired by the massive drop in housing interest rates.

So housing has not shown any tendency to follow a lead set by the share market. Whither this strategy?

It is always valuable to be aware of patterns like this and when they don't work, to try and figure out the reason. On this occasion, dramatic events have dominated each of the markets and swamped any usual behaviour.

It is not too bad. We only need among all our strategies, to be right on most occasions or on our bigger positions, to have a comparative advantage.

Don't buy or sell property just because of the share market - always wait until property prices themselves started to move in the right direction, to give you further confidence before taking action.

2. Property may be the easiest market

Despite a lot of talk about whether stocks, bonds or cash are the best investment, it may be the property market that is the easiest of the markets, for three reasons:

1. You can watch the stock market for a useful buy or sell indicator, and hve plenty of time to act in the property market.

2. There are not many false trends in property prices. The market is not a listed market where everyone can see the prices - deals are done privately and price trends develop slowly and surely. You can wait for the herd to start to move and then join them for a nice journey.

3. Just about everywhere, there is no tax on capital gains on people's own homes.

Ref: 100 Secret Strategies for Successful Investing by Richard Farleigh