February 17, 2020 by Dymphna

What’s next for property ? (look at the stock market)

I don’t always take an interest in the stock market, but when I do, I take a very keen interest…

I’m thinking about buying some stocks in JB Hi-Fi.

I think it’s got some good prospects for capital growth over the next 6 months.

I’m also pretty confident I can sub-divide the stock into two. If not, then I think I can increase the density somehow and get a better dividend return.

No. Of course not. If you try to manufacture growth in your share portfolio, it’s called stock manipulation and you can go to gaol.

Which is exactly what I love about property. There are so many (legal) things you can do to make money.

But I’m not here to rag on stocks. In fact, right now, I think we should be paying a bit of attention to the stock market.

And while I’m not here to endorse JB Hi Fi stock, it is a company that just posted some pretty decent results, and it’s share price is moving higher with the broader share market.

And right now, the ASX index is closing in on all time highs – highs achieved back in August last year.

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What’s going on here?

Well, obviously it’s the Corona virus.

Oh, I mean, it was almost certainly the bushfires. Or was it Brexit? The trade war with China? The prospect of war in Iran?

Oh who knows!

Who knows what is driving the market higher? There doesn’t seem to be any particular reason, other than that’s just what happens when the economy is chugging along.

But this is exactly what’s interesting about the market right now. If you wanted an excuse for a stock market crash, there has been a litany of them in recent months.

If the stock market had crashed, no one would have blamed it. “No, of course. What can you do? It happens to the best of markets. Absolutely nothing you could have done. Get ‘em next time tiger.”

But the stock market has just shrugged it all off, and now we’re closing in on all time highs.

And what happens on the other side of that?

That’s where I think it gets interesting.

Every time the market breaks through previous all-time-highs, it gives us a good news story.

People like good news stories.

After a while, it becomes a bit of a theme. It becomes the vibe.

“The economy is doing well. The market’s moving higher. Things must be good.”

And at the same time as confidence is coming back, people are feeling wealthier too. They’re looking at their portfolio balances, and they’re feeling richer.

It gives us something economists call a ‘wealth effect’. We usually hear about this in relation to rising house prices. As house prices rise, that gives people the psychological effect of feeling wealthier, but it also frees up equity. That equity will normally go first on renovations or a new dishwasher or a boat (Equity, mate). But sooner or later people will think that they should spend it on something sensible – like an investment property.

But we can get a wealth effect out of the share market as well. After a few good years, why not pull out $50K for a deposit on an investment property? Probably worth ‘cashing in’ some of those gains anyway, in case the market wobbles.

Increases in wealth increase your access to credit, and it’s credit that drives house prices.

And so a market like this gives us a double-wammy. Confident people with more access to credit… that feeds straight through into house prices.

And in that way, certain share market conditions are a leading indicator of house prices.

And that’s why I’m taking a bit of an interest in the share market right now. If we get past previous ATHs, while unemployment remains low and industrial activity continues to improve, it could cause a shift in the collective consciousness.

Suddenly the good times are rolling again.

For a property market already in full-recovery, that could be a serious dose of catnip.