As Real Estate Rises, So Do Stocks

“It would be better if more people buy stocks rather than involving in speculative real estate investments” (July 17, 2005, at dinner with the National Assembly speaker, Supreme Judge, Constitutional Court President, Prime Minister, and National Election Commission chief, at the residence of the Assembly speaker)

“What I want to say to the public is, ‘Lets see who wins; the stocks or housing. I bet the stocks will win” (August 25, 2005, President Roh’s town meeting with the public.)

Those are the remarks made by President Roh about stocks and housing last year.

The current administration has implemented policies to restrain the real estate prices and stimulate the stock market. In other words, it separated its policy for the real estate market from the stock market policy.

The policies were meant to raise the stock prices by leading the money flow into the stock market by preventing people from investing in real estate markets with their spare money.

However, despite the government’s intention, it is getting more obvious that the stock market and the real estate market prices are moving in the same direction.

Dong-A Ilbo’s legwork team examined the data of Korea Exchange (KRX) and Kookmin bank to find out how the winds blew in the two markets. It turned out that when real estate prices go up, the stocks prices increased too, and when the real estate prices settled down, the stock prices plummeted.

According to Kookmin Bank’s research on the trend of apartment prices in Korea, the prices first stabilized, then increased, and stabilized again.

From the beginning of the year to March 6, there was a mere 0.2 percent or less increase every week in apartment prices, which can be regarded as the stabilized period while the KOSPI index dropped by 3.20 percent.

From March 6 to April 17, the apartment prices went up again by 0.3 percent every week, which can be considered as an up phase, while the KOSPI index went up by 5.79 percent.

From April 17 to July 3, when the increase in apartment prices went down by less than 0.2 percent every week, the housing market cooled down and the stock prices dropped sharply by nine percent.

The synchronization of the real estate market and the stock market does not only happen in Korea. The two assets clearly moved in the same way in other countries too.

According to the NAR, the house prices have dropped for the recent two quarters. Also, the NAHB index, which shows the tone of the housing market in the U.S, plummeted to the lowest level in 11 years.

Major U.S. stock indexes are steeply falling this year due to the downward real estate prices. This is why some experts predict that the government’s intention to restrain real estate prices and attract the capital into the stock market will not work.

It is said that a bearish real estate market does not make people invest in stocks but actually discourage consumption and investment sentiment, resulting in reduction of other asset values like stocks.

Even in the long term, the two assets fall together.

According to Good Morning Shinhan Securities, there were times when the two assets moved in the same direction in the past too; from March, 1991 to July, 1992 and October 1997 to November 1998. During the periods, the real estate market was weak and the stock market was sluggish as well.

Wan-Bae Lee roryrery@donga.com imsoo@donga.com