The main driver of housing markets is interest rates and changes to the real economy, not the financial sector but general economic activity

Mike Ball, South Bank University

This time last year, house prices were rising. So were stock market prices.

One year on and UK shares are now close to a three-year low. The question is, will property prices follow suit?

Short term memory

In the past 100 years, there have been a handful of stock market crashes which have earned themselves a place in popular memory, largely because their influence swept far beyond a gilded frantic few in a City trading pit.

Will the falling Nasdaq prompt a UK housing slump?

First off was the Wall Street crash.

In 1929, the US shares index crashed and the repercussions were felt through the whole economy for the next decade.

As millions were thrown out of work, thousands of homes and farms were repossessed, sending the property market into reverse in the US.

In the early 1970s, the soaring oil price sent the world, and particularly the UK, into recession.

This did coincide with a slump in the housing market but South Bank University's professor of Urban Economics Michael Ball points out that in this case the housing slowdown did predate the share price crash.

The stock market crash of 1987 signalled the beginning of the end of the 1980s boom.

When house prices began to tumble in the early 1990s, it became clear that the good times were over.

Over a quarter of a million homes were repossessed, as high interest rates and unemployment made it difficult for people to meet their mortgage payments.

The housing market did not properly recover until 1996, and even then recent memory made consumers cautious.

The Asian crisis in 1998 sent stock markets and house prices tumbling

When the Asian crisis enveloped world markets, prompting stock markets to shudder, the housing market slowed.

Chicken and egg

In these examples, was it stock market weakness that caused the housing market to stumble?

The nature of stock markets is they react quicker than other economic indicators - forecasting an economic slowdown that will not appear in economic reports for several months.

So, this year's stock weakness could result in housing market weakness next year.

Some economists argue that other factors are at play - with both the stock market and the housing market suffering when the domestic economy turns down.

The housing market may have slowed when the Asian markets did in 1998, but South Bank University's Michael Ball points to widespread predictions of UK recession around that time as a more likely reason.

Real disposable income ground to a halt in 1998, Halifax expert Martin Ellis said, and he attributes this to the introduction of tax self assessment, which upped the tax burden.

While analysts are loathe to say there is no correlation between stocks and houses at all, they do say that it is indirect.

Nationwide chief economist Alex Bannister points out that: "Stock markets tend to over adjust in the downward direction."

South Bank University's Ball adds: "Stock markets in real terms went way down far below what happened to house prices [ in the early 1970s]".

One reason for divergence is that stock markets tend to be more sensitive to global finanical worries.

These global financial worries may not impact on the domestic economy, and hence house prices may not be effected.

Stocks falling

So, what does influence house prices?

The amount of disposable income people have is a key factor, and this is governed by interest rates, average earnings and unemployment.

"The main driver of housing markets is interest rates and changes to the real economy, not the financial sector but general economic activity," South Bank University's Michael Ball said.

"In so far as financial markets are correlated with the real economy, there is a correlation, but it is not a direct correlation."

The influence of the financial sector may vary regionally.

In the City of London, some people may rely on city bonuses to buy a house.

Falling share prices may deter buyers in the City of London

In other parts of the UK, where the local economy centres on manufacturing, the strength of sterling may be a more important factor.

And in the UK there is another factor - the limited supply of houses, due to tight planning control on a small island, which means that house prices have risen more strongly during booms than in most other countries.

A new slump?

So far, the fall in stocks has been linked to fears that the slowdown in the US could lead to recession in the UK, a subject on which opinions are mixed.

Council of Mortgage Lenders' economist Dean Garrett wrote in a recent article: "In the UK, smaller net borrowing by consumers and the larger proportion of wealth in housing means that economic growth is more likely to be sustained by consumer spending."

By contrast, in the US, more people have their money invested in stocks, so falls in stock prices have a direct bearing on disposable income.

Halifax expert Martin Ellis says: "The view at the moment is that it [share price fall] is unlikely to have an impact on mainstream housing because by and large people aren't relying on stock market investments to finance house purchase."

So far, the official outlook for house prices remains one of steady growth.

Property prices in real terms started to fall in January, according to the Halifax.

But both it and the Nationwide Building Society maintain their outlook for steady growth in the year ahead.

"At some time, in future, the risk would be that property prices and real economy will grow less strongly, it doesn't mean they have to fall," Alex Bannister, Nationwide chief economist said.