2014 Conference

In most developed countries, especially Australia, stock and real estate are the two most important asset classes in household portfolios. The purpose of this paper is to examine whether a wealth effect exists between Australian stock and housing markets, and the nature of the adjustment to this long-run equilibrium. This enables us to gain a better appreciation of the potential behaviour of consumers in the face of positive and negative economic shocks and the potential impact on financial wellbeing. Using threshold autoregressive models, we find evidence of a strong wealth effect between housing and stock markets, meaning that gains in one market are invested partially in the other. In fact, counter to existing findings outside Australia, there is greater evidence of the flow of capital from housing to stock markets than from stock to housing markets. However, there is no evidence of asymmetry in this relationship. This implies that positive (negative) economic shocks will exhibit a doubly positive (negative) impact on household portfolios through the impact on both housing and stock assets. This dangerously exposes Australian households to possibly deteriorating conditions in both markets, a matter that could be quite adverse in the case of households nearing or in retirement.