There was some debate over at HPC as to what sort of correlation there was between the FTSE 100 index and house prices. Here's your answer (click to enlarge):
Nationwide figures from here.
FTSE 100 figures from here, I used the last available date in each calendar quarter.
Here's the chart prepared by EKTWP (see comments under this post for explanation, click to enlarge):
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7 comments:
Going back to January '91 using the nationwide housing average figures and the end of month total return (inc dividends) for the FTSE 100, there is a correlation of 78.2%. Other than '97-'00 the lines move pretty much in conjunction, but I don't know how to paste an excel chart into the comments box....
EKTWP, email me the sheet or a chart as a picture (preferably jpg or something small) and I can add it.
I'd be nervous of adding dividend return because then we'd have to add notional rental income to housing and it all gets a bit subjective.
So what changed in 2002?
B, your guess is as good as mine.
My guess is, once the previous house price/credit boom/bust bottomed out in the early 1990s, the economy picked fairly quickly up so shares soared in late 1990s, and people were still wary of buying houses.
Shares got ahead of themselves by 2000 and popped, so central banks cut interest rates to keep things moving, until the share price and house price bubbles synchronised again in about 2003 - both were pure credit driven bubbles, there was no real economic growth behind either.
At present, either houses are overvalued or the FTSE is undervalued.
Try correlating the slopes - the first derivative or rate of change. The match is even more striking.
MW I'm certain there was a dramatic increase in productive economic activity coming from the tech boom. During the 90's. And this went of course into land values eventually, so helped the housing bubble along. This is shown as the unknown error in your housing graph from last year. (I do keep saying) And there will have been a turbo lag in time converting from production into rent
Granted the last few years of the dotcom bubble were nonsense. And this crash took several years to play out totally, especially in the UK
There was also a little blip up after we realised that 9/11 was not so bad after all
There was also some irrational exuberance in 2003 after "we" invaded for capture of valuable land in the middle east.
Having gazillions invested on stocks at the time one tends to notice the slightest blips.
Just my $0.02
Anon, why bother? There are clearly periods when they are in sync and periods when they aren't, and there is then the risk of over-analysing.
RS, I still struggle with that balancing figure (although you may be right).
Let's agree that in times of rapid technological change, share prices increase faster than house prices - why would this lead to new builds selling at such a big premium?
We can hardly argue that new builds in the late 1990s were technologically more advanced than those built ten years earlier. But perhaps we can argue that 'new stuff' was in such demand that the relative price of land dropped and the price of new houses remained constant?
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