The sizeable fall in the FTSE100 this week (down something like 6.5% since mid-January before recovering slightly) has prompted a few thoughts on the differences between stock market crashes and property crashes.
The most obvious difference is that the stock market is far more volatile than property prices: it's not normal for the FTSE100 to fall by 5% in a day, but nor is it as unusual as you might think. Individual shares can double within a year, or lose half their value overnight (as happened to Capita recently).
Property doesn't have that kind of volatility, for at least a few reasons.
Firstly, we don't have a real-time minute-to-minute consensus about what a property is worth. If a couple of property sales on a street are agreed at a lower level than expected, it will take time for that information to be factored in and start to affect the expectations of other nearby buyers and sellers.
Secondly, it's harder to panic buy or sell property based on sentiment. If you see the value of your stock portfolio falling, you could (but probably shouldn't) instantly sell before it falls any further. With property, even if you panicked today it would take at least a couple of months for the sale to actually happen – and again, then even more time for that information to be factored into the market.
And thirdly, property prices tend to be sticky. If prices are falling, owners often can't bring themselves to sell at a loss – or actually can't, because they'd end up owing more on the mortgage than they'd achieve from the sale. I've heard lots of anecdotes recently about how prices in an area are supposedly falling, but the effect isn't cheaper houses: it's the market completely drying up, as everyone takes their house off the market and waits for the market to pick up again.
None of this is to say that property doesn't fall in price – it does. We do see property crashes (albeit over months rather than days)…but falling property prices are often a lot less visible.
For example, property prices are expected to rise by little more than 1% this year. Inflation this year is expected to be somewhere around 3%. So if that pans out, we'll see a real-terms fall of 2%. If that pattern holds for five years, property is suddenly worth 10% less than it was.
In other words, there doesn't need to be a dramatic collapse in order for house prices to correct: just by stagnating for a few years, there's time for incomes to catch up without individual owners needing to bite the bullet and sell at a nominal loss.
So not only is my stock market portfolio worth more than 5% less than it was at the start of the year, my property portfolio might actually be worth less at the end of 2018 even though it appears to be worth slightly more.
A cause for doom and gloom? Not at all – these things move in cycles, and the long-term trend has historically always been upwards.
Whatever happens this month or this year, the fundamentals haven't changed. I still expect companies to find ways of operating more efficiently and increasing their profits, so the long-term trend in stock markets will be up. The supply/demand imbalance in UK housing isn't changing much, so I'd expect the long-term trend to be up.
Stock market falls and property falls look different, but neither is anything to lose sleep about if you invest based on fundamentals and take a long view. Just be aware of the subtle but powerful effect that inflation has on your investments, and don't kid yourself that you're getting wealthier until you've factored it in.