We are starting to appreciate some of the damage that the Covid-19 crisis is doing to the economy but in the western world the first warning lights came when stock markets lurched downwards in late February. In the past 6 weeks There has been quite a rally (ironically since the UK went into lockdown on March 23) but at the end of last week (May 1) the FTSE100 index was still 24% down on its end-2019 level. From a property perspective, equities represent an alternative asset that often have a knock-on effect on property values as they would otherwise look expensive relative to equities and both asset classes are reacting to similar market signals.
To assess how strong this relationship is we have looked at what has happened to property values when there has been a stock market crash. The rows in Table 1 below show every year in which there has been a double-digit fall in equity prices going back to the devaluation crisis in 1969. The data in the table show the percentage change in equity prices in the year in question and the percentage change in commercial property values in that year and the two subsequent years (CY+1 and CY+2).
For example, in 1969 equity prices fell by 15.6% but commercial property values only fell by 0.1% and in the following two years they increased by 19.2% and 10.8% respectively. What Table 1 shows is that in only three of the 10 years since 1969 that have seen double digit equity prices falls have commercial property price fallen by a significant amount. Between 2000 and 2002 when equity prices fell by a cumulative 43%, property values actually increased by a cumulative 8.6% and they continued to rise in the following four years too benefitting from the low interest rate environment ushered in by the .com crash.
The three years that actually conform to the expected relationship are 1974, 1990 and 2008. Following the 1990 and 2008 equity price crashes there were runs of particularly severe falls in commercial property values.
Before delving into why property values fall in some years when equity prices decline materially and not in others, Table 2 looks at the relationship in a slightly more rigorous way by looking at equity and property prices after having allowed for inflation.
Looking at the data in real (i.e. inflation adjusted) terms reveals more years when equity prices fell by more than 10% but there are still only three years where commercial property prices also fell by more than 10% in real terms. The three years of 1974, 1990 and 2008 still stand out as the years when property values fell heavily in the same year as an equity price crash.