Chinese stock market chaos impacting your property value?
It's been all over the news lately. The Chinese stock market is going crazy. Between 1 January to 12 June 2015, the Chinese stock market was up 59.7%. Then, in the space of a month, it fell by 32.1% to reach a low on 8 July.
Most commentators believe that the Chinese government will control the situation. But some people are suggesting that it will impact Australia. The big drop in the Chinese stock market will push down property prices in Australia.
The idea here is that Chinese investors are coming to Australia and buying up all the property, driving up prices. Most well informed commentators will tell you that is not the whole story.
So ... will the falling Chinese stock market will impact your wealth? We looked at the likely impact of a falling Chinese stock market on your shares and your property.
Aussie Stocks Going Down?
We often hear about global stock markets moving in the same direction. China is a key trading partner to Australia. You can join the dots.
Well, this concept is completely unsupported by the numbers. If we look at the last 15 years of data, the ASX and the Chinese stock market has a correlation of 0.348. For the everyday person, this means when the Chinese market falls, the ASX is likely to fall. But the trend and relationship is only moderate.
Compare this to the correlation between the ASX and the US stock market - a correlation of 0.741. Whilst there is likely to be a general trend that the ASX suffers when the Chinese market falls, the magnitude of the issue is not that big of a deal.
Property Prices Going Down?
We keep hearing about Chinese investors buying up all the good property in Australia. They are accused of pushing up prices, making it harder for the hard working Australian to buy a home.
So, if the Chinese stock market is falling, their wealth will also be heading south. This will make them less competitive in bidding for property in Australia.
Looking through 2001 to 2014, this idea is also unsupported by the numbers. The ABS's Residential Property Price Index has a 0.403 correlation to the Chinese stock market. Again, the relationship is only moderate.
This is highlighted when you look at the incredible run of the Chinese stock market in 2006-2007. That was followed by the massive drop in 2007-2008. In this time of intense volatility, Aussie residential property prices were humming along steadily.
So ... China Doesn't Impact Our Wealth?
Well - no. China is a key trading partner with Australia. Their economic outlook has a huge impact on our economy and our wealth.
But, the Chinese stock market is not a good gauge of China's economy as a whole. What we need to focus on Chinese GDP instead. For example, the correlation of Chinese GDP to Aussie mining stocks (as represented by the ASX 200 Resources Index) is 0.561, a meaningful relationship.
For now, you probably don't need to worry about the chaos being played out in the Chinese stock market. Unless you own Chinese shares that is ...
Notes / Sources:
Australian, Chinese and US stock markets are represented by the ASX 200 Index, Shanghai Composite Index and the S&P 500 Index respectively. Australian residential property is represented by ABS Residential Property Price Index. Chinese GDP and index returns sourced from S&P CapitalIQ.