COVID-19 impact on global property markets: Why are housing prices rising in the west?

[ecis2016.org] According to The Economist, during the 2008 global recession, housing prices fell by an average of 10% but this time it is different, as prices are on the rise and demand is higher than ever

The COVID-19 pandemic has forced massive lockdowns across countries, for almost six months. A sizeable share of this population is still working from home, which is giving way to the need for additional spaces. However, with job loss and income levels dwindling, everyone expected the demand for real estate, especially in the housing sector, to fall like what happened during the global recession of 2008. Instead, the real estate market may have taken a turn to the contrary.

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How COVID-19 impacted western housing markets?

According to The Economist, during the global recession, house prices fell by an average of 10%. Now, as the world economy is pushed into its deepest downturn since the Depression of the 1930s, housing prices have picked up in a number of middle-and high-income countries at an annual rate of up to 5%. Similarly, share prices of property developers, which fell by almost 25% in the early phase of pandemic including in India, recovered from the fall very soon.

In fact, house prices in Germany were 11% higher than the previous year, whereas in South Korea and China, authorities have had to tighten restrictions on buyers due to rapid growth, according to The Economist. Experts are of the opinion that there are three major reasons behind this growth.

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1. Interest rates fall after Corona

Almost every country has cut benchmark interest rates by almost 200 basis points, which has brought down the average cost of borrowing. According to an estimate, Americans can take a fixed-rate mortgage at 2.9%, as compared to 3.7% at the beginning of the year. As a result, borrowers are now affording bigger mortgages to buy bigger homes, while those with existing mortgages are switching to fixed home loan models for the extra cushion.

2. COVID-19 recession: Governments offer cash hand-outs

During a recession, people lose jobs and incomes fall, which results in EMI defaults and subsequently foreclosures, which drag housing prices down, as new supply keeps getting added to the market. This also affects the credit history of the borrower, making it harder to borrow again. However, this time, the rich countries handed out cash to the households, to preserve income. Wage subsidies, furlough schemes and welfare benefits now amount to 5% of the GDP in most of the American and European countries. In fact, the household incomes in the large economies were USD 100 billion higher than they were, before the pandemic.

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3. Other government measures to deal with the COVID-19 impact on real estate

Many western countries have taken a number of steps, to help households and home owners and support the housing market. European countries, such as Spain and the Netherlands, have allowed borrowers to suspend their loan repayment and foreclosures, respectively. Japan has asked banks to defer principal repayment on mortgages. Likewise in India, loan EMI moratoriums were announced for a period of six months, which helped home owners to save extra cash for expenditure.

Will the COVID-19 crisis create a housing bubble?

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With this additional income in hand and other supportive measures, buyers are on the hunt for the perfect homes for their needs, where they have enough space to move around, take work-related calls without any disturbance and have an additional room when they are working from home. The luxury of space comes only in the suburban market, which is already seeing a boom in prices and demand. According to Zillow, urban and suburban property prices are rising at the same pace in America. In Britain, prices of independent houses are rising at an annual rate of 4%, as compared with 0.9% for flats, according to The Economist.

However, this might be a cause of worry for some of the biggest housing markets, as according to Swiss banking giant, UBS, many developed countries are seeing house prices rise even while the Coronavirus infection rates rise again. In the second quarter of the year, prices rose in eight out of 10 high and middle-income countries, with US prices up by 5% than a year earlier and Germany’s up by 11%.

According to the Global Real Estate Bubble Index 2020, out of the 25 major cities analysed, over half are at risk of a housing bubble or are overvalued. The typical signs of a bubble, such as decoupling of prices from local incomes and rents and excessive lending and/or construction activity, are starting to show.

The Index quotes Toronto at the risk of a housing bubble while Vancouver, Los Angeles, San Francisco and New York as overvalued. Europe and Hong Kong face the greatest risk while Munich, Frankfurt and Warsaw are at the top of the list. Only four cities, out of 25 analysed recorded drops in home values – Madrid, Dubai, San Francisco and the UAE.

Property markets have shown growth during the pandemic that is akin to stock exchanges but unemployment is rising and wages are stagnant. Rising home prices are attracting investors but are also driving inequality, as higher prices would mean higher rents and first-time home buyers would find it difficult to find a match in a volatile housing market.

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