by Milton Johanides

Created on: July 28, 2010

We have seen two bull runs since 2008, periods of sustained stock market growth, which seemed to have been influenced very little by the state of the property market. The first bull run ended in a rapid slump. At the time of writing the second bull run has begun, with both US and European exchanges heading upwards. But still the housing market does not seem to be having an influence, since property prices are at best, only just beginning to bottom out. So how is it that stock markets can behave with such confidence, when the housing market shows little signs of recovery? Is this the first step towards a decoupling of the link between the two?

In theory there is no reason why the stock market has to rely on any single market sector since it covers all market sectors and can absorb or reject failing markets as it needs to. Certainly in the past, construction has been a significant part of the economy and very often the key indicator in a nation´s health. If houses are being built and sold, then individual owners are being enriched by that, companies specialising in construction materials do well, and since construction jobs are relatively well paid the employment figures benefit too. But in recent years, with the technological boom, there has been an increase in service industries, particularly those who involved in telecommunications. So the supply of a service, such as Internet search engines, for example, is now big business, a completely new trading sector. Following on from the new trends in technology, computer parts and equipment manufacturers as well as mobile phone providers will naturally be the key to future economic growth, perhaps moreso than the traditional industries of the past, such as construction.

If the stock market has enough fuel from new market sectors to drive growth, it will not be concerned by a lagging housing market, at least not in the short term. As stock markets make money from short term bets as well as long term ones, the values of companies that are on a rapid rise will attract attention and rise even faster. If the long term outlook is not so good, it doesn´t seem to matter. By contrast, the property market is a long term consideration. In the past, as house prices boomed, people felt wealthier and were happy to go out and spend. If the rental sector takes over from property ownership, we may not see so much money being spent on household goods and improvements. On the other hand, more wealth would be reserved for holidays, clothes and disposable items.

Whether we are witnessing a temporary glitch in the value of the housing sector or a longterm adjustment, remains to be seen. But the certainty is that the adaptability of the stock market means that it will take on board any changes as it needs to.

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