Property, in particular housing, has been an important asset class during the past two years, offset...
Property, in particular housing, has been an important asset class during the past two years, offsetting losses accrued through falling equity markets, according to Standard Life Investments.
Andrew Milligan, head of global strategy at the group, believes the equity bear market has, to some extent, been offset by the bull market in property.
'There is little doubt the decline in equities over the past couple of years has had a negative impact on wealth in the US and UK,' he says. 'But in terms of the outlook for consumer spending, it is important to put this into context.'
Milligan believes it is too simple to assume the decline in equities between 2000 and 2002, and over the past few months in particular, will cause a slump in consumer spending and therefore a double-dip recession. The rise in wealth from the housing market has so far provided a significant offset so that the overall effect has been limited, he says.
'For example, the UK housing market has risen by 40% over the past three years when equities have fallen by 30%,' Milligan notes. 'Our research also shows housing wealth is spread more evenly over the population than equities, which are more concentrated among the higher income groups.
'As these groups have a lower propensity to consume, the strength in housing will provide a bigger cushion to aggregate consumer spending than the overall figures suggest.'
House prices are important, he adds, not just because lower income groups hold more property than equities but because house price changes have a faster effect on more of the population than equity markets.
Milligan quotes research from the International Monetary Fund, which shows that, in general, the wealth effect from housing on consumer spending is twice as large as from equities and appears more quickly.
The proportion of the population holding equities varies, which affects the transmission of this effect, he says. For example, around one in two adults in the US own equities compared to just one in four in the UK and one in 10 in France.
Milligan argues it is important to remember wealth has only fallen back to a more normal multiple of income after rising abnormally during the technology bubble.
'The overall trends in net wealth over the past 10 years or so are still favourable and, as long as house prices remain steady, consumption should hold up,' he says. 'However, any signs of a downturn in the property market would be worrying for policymakers.'
Nick Mansley, head of property strategy at Morley Fund Management, agrees the property bull market has offset the equity bear to some extent.
'Lower interest rates have meant a stronger consumer than we would otherwise would have had,' he says. 'This has indeed lead to stronger consumer spending, offsetting equity falls.'
Property funds have benefited more from a higher exposure to new investment capital than from capital flight from equities, Mansley argues. This capital is likely to flow out more slowly than it went in, he says, as property is more expensive to exit than bond or equity asset classes.
One consequence of the weak equity markets has been a strategic move away from central London office space, he adds.
Equity losses offset by property sector.
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