There are so many things that affect the stock market, some of which may be obvious, while others are not quite so visible. Typically, any movement in oil prices, inflation rates, employment rates or interest rates will affect the stock market. Additionally, wars, company mergers, company buy outs, bad company reports and natural disasters affect the stock market. However, it is often overlooked how tremendous of an impact the property market can have on the stock market.
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The Relationship between the Property Market and the Stock Market
The key link between the property market and the stock market is the interest rates. Most people cannot afford to buy houses outright. Therefore, they must acquire loans from banks or financial institutions to pay for their mortgage. The interest rate is what borrowers have to pay the lenders for using their money, in addition to the amount they gave them to use for their mortgage, and when the interest rate is high, borrowers will thus pay higher interests on their loans.
What Leads to High Interest Rates?
Banks borrow money from central banks, which then charge them an interest rate for borrowing the money. To recoup the interest rate, banks add their own interest rate onto the amount of money borrowed from them. If the central bank increases the funding rate, it becomes more costly for the banks to loan money from the central bank. Again, the banks will have to increase the interest rates they charge their borrowers, in particular, the interest rates on mortgages and credit cards. As a result, the consumer buying behavior and investor behavior will be affected. The disposable income will be less, and customers will be reluctant to spend money. This change in spending behavior will indirectly affect the net-profit of businesses.
Businesses are also directly affected by the interest rates since they borrow money from the banks. High interest rates will mean they now have to pay the bank more money for their loans, and they may not be able to afford to borrow more money due to these high repayments. This means business may not be able to access funds needed in order to grow their businesses, and thus, the revenues and profits will be negatively impacted.
The Interest Rate and the Stock Market
The upward or downward movement of the interest rates greatly affects the behavior of both consumers and businesses, which in turn, affects the stock market. The value of a company in the stock market is determined by the sum of the expected future cash flow and the future discounted cash flow, divided by the number of the available shares. If a company cuts back on its spending and its profits decrease, the expected future cash flow will also decrease and the company stock value will drop. Therefore, interest rates have an impact on stock prices and market trends in general, which is why the property market can affect the stock market so tremendously.