real estate and stock market


It is difficult to determine a correlation between real estate and stock exchange and this behavior will change depending on the economy. The principle that can be followed while performing any research/analysis can include:

  • Those few that accumulate capital have to invest it somewhere. And, that pretty much comes down to three choices for those not brave enough to risk their capital on their own/business venture: currency (banks), equities (stock market) or real estate. Thus, capital flows from one to the other.

  • Real estate sales is also dependent on various macro and micro economic factors, namely
    1. The economy:The strength/weakness of a country’s economy along with the global economy will influence both stock and home prices. For example, a strong economy typically features high demand for products and services, including real estate and other investments. During these periods of general prosperity and demand, you could substitute products for home prices and see the same overall increases, further confirming the lack of a relationship
    2. Inflation
    3. Financial logisticsThe entire game of real estate is dependent on demand-supply and the financial tools available to further support the demand. Mortgage ease is a very big enabler for real estate across countries. In fact the entire real estate in the US is runs over mortgage (which was in fact a prime reason for the famous sub-prime crisis). Lending rates prevalent in the economy also boost/suck real estate sales.
    4. Funding policies
  • Both real estate and the stock market reflect the economy of a country and offer good investment opportunities. However, the risks must be understood along with the opportunities. The profit margin inherent in stock investments has always been higher when compared to other asset classes. Stock market investments offer advantages such as liquidity and flexibility, which real estate does not. Stock prices also offer growth rates that the real estate market can rarely match. Stocks are also relatively easier to acquire and require lower investment to buy, sell and hold as compared to real estate, which has high transaction and other related costs such as broker commissions, legal fees, property taxes, insurance and maintenance costs
  • Also, the ROI for real estate is reasonably consistent because of the phenomenon of property appreciation. Even if the value of a home drops, the chances of the home owner abandoning for another option are negligible. This is in sharp contrast to the stock market, where an investor may decide to trade in his entire stock portfolio in a matter of minutes with just a click. If one buys property and holds it for the long term (7-10 years) one isn’t likely to lose. Real estate values generally go up in the long run, with few exceptions. Fundamentally, the real estate market is a lot less volatile than the stock market. Real estate investment also offers benefits such as tax deductions on home loan interest, continuous capital appreciation and greater stability. Property historically appreciates in value without many violent downswings. It can be purchased on a down payment of 1/5th of its total value, and the remainder can be financed by a bank. On the other hand, you can at best delay the Long term capital gain tax form real estate and hence your returns would always be compromised when compared to that from stock exchange
  • Real estate prices tend to sink far slower than they rise, since property owners are more hesitant to sell in a downturn. Property investment also helps in diversification, hedging inflation and yield enrichment. However, investors need ensure that the company is professionally managed and that investment decisions taken with circumspection. Obviously, there is a direct link between the stock and real estate markets. In an escalating stock market, the profits find real estate the best place for reinvesting funds, leading to escalation in property prices. A rising stock exchange would also mean better economic scenario, more liquidity in the market, easy financing etc. By the same coin, the gradual collapse of stock markets reflects visibly on real estate markets. Both markets represent the two major asset classes for growth investing. Both allow investors to participate in long-term appreciation of values.


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