Is it possible for a share market crash to cause a property price collapse?

The global stock market has rattled investors over the past week, but could a major crash affect the property market in Australia?

The stock market is undergoing a rollercoaster ride, and many economists believe a recession is imminent, with 65 percent chance of occurring in the next 12 months.

Global stocks have lost a mind-numbing $6.4 trillion in three weeks.

Are those losses likely to result in a property retraction or crash, even if they are compounded?

Property prices fell in some parts of the country during Australia’s last major recession in 1990-91. Despite the decline in Melbourne real estate, the country’s property pool overall performed exceptionally well.

This was quite an accomplishment, given that the recession was one of the worst since the Great Depression.

While Melbourne’s property prices fell and didn’t recover to 1989 levels until 1996, its outlying poor performance came after a heady 1980s boom and was viewed as inevitable.

When faced with the insanely high 17.5 percent repayments that mortgagees faced back then, borrowers despairing at today’s interest rate levels would suffer paroxysms. As a result of the relatively rapid decline of those rates, property prices remained resilient during those difficult economic times.

How has Australia handled sudden stock market crashes that hit like a car crash when recessions creep up on property owners and prospective investors?

For those with superannuation, share portfolios and careers in finance and elsewhere, the Global Financial Crisis of 2008-09 was a traumatic experience.

The events that caused tremors around the world barely registered an interest in property prices. Although shares in Australia dropped more than 10 percent and the Aussie dollar lost 30 percent, it was less affected than the rest of the world.

What is property? Before dwelling values resumed their upward trend in 2010, there was a minor blip in 2009.

According to an overview co-authored by the Australian Bureau of Statistics and Reserve Bank of Australia (RBA), the Australian credit and money markets have proven to be more resilient than in many other countries, so the RBA needed to intervene much less than it had to elsewhere.

According to the report, this is partly due to the health of the Australian banking system.

Compared to other global banks, the Australian banks held almost no ‘toxic’ securities.

The health of the Australian banking system facilitated the effective implementation of monetary and fiscal policy, particularly by allowing much of the large easing in monetary policy to be passed along to interest rates on loans to households and businesses, in stark contrast to other developed economies.”

Financial landscape for 2024

In the years since the pandemic, share markets around the world have surged to record levels.

In the days leading up to this week’s bout of volatility, which saw Japan’s Nikkei Index drop 12.4% in one day and then gain back 10.4% the next, and the US and European markets contract sharply, it was buy, buy, buy.

Fourteen of the world’s 20 biggest stock markets hit record highs during the past couple of months, including New York, London, and Tokyo.

The US economy, where many international financial contagions have originated, is doing well, inflation has moderated, and corporate profits are strong, analysts said, so investors can be confident in the Federal Reserve and stocks are high. It was warned, however, that if any of those factors upset the balance, trouble could follow.

Unemployment has emerged as that factor.

The US jobs report last week shocked on the downside, raising fears of a slowdown in the world’s largest economy.

In coming months, we will know whether this result contributed to a ‘healthy correction’ in stock markets or is a sign of more turmoil to come.

Possibly expanding Middle East conflict, or even the same outcome beyond Ukraine and deeper into Europe, China’s slowing economy, unpredictable regional sabre rattling, and a global herd reaction if another large equity sell-off occurs could all throw a wrench into the often opaque inner workings of the international economy.

As Covid proved, even the complete freezing of global supply chains was not enough to bring down the real estate market when Australian property was viewed as a safe haven.