The vast majority of people have been locked down in their houses or apartments for extended periods of time in 2020. However, the coronavirus pandemic will have a much greater effect than changing people’s views of their homes. It has the potential to have a massive impact on the worlds’ property markets.
It is all but certain that with the wage cuts, high unemployment rates, business failures, and job uncertainty, many people will exercise caution when it comes to making the biggest investment of their lives – purchasing a home. That usually translates to falling house prices, and during the most recent recession and credit crunch of 2008/2009, it is exactly what was witnessed in the US, UK, and many other countries.
The Nationwide house price index in the United Kingdom for May revealed that prices dropped 1.7 per cent from the month prior, which is the largest drop in 11 years. Robert Gardner, Nationwide’s chief economist, highlights the fact that there are signs it has started stabilising. He adds that this can be attributed to the current situation not being a traditional economic downturn.
Rather, it is the UK government and many other governments in the world that have consciously chosen to put much of their economies on hold. It was at the same time putting in place measures for supporting businesses and households, such as the worker furloughing scheme. The hope is that as lockdown restrictions are lifted, housing markets and economies will slowly rebound.
House prices are still on the rise in the United States. Prof. Nori Gerardo Lietz who is a teacher of real estate investment at Harvard Business School says that many parts of the country have put a moratorium on evictions for about 60 to 90 days, but it can be for as long as 6 months in some areas.
It therefore means that the most pressing problems have been pushed to banks and landlords, which doesn’t automatically mean that there won’t be trouble down the road. Especially because the unemployment rate in the United States remains very high since the coronavirus lockdown – 13.3 per cent in May, which is marginally lower than April’s 14.7 per cent.
Behind these headline figures, however, are other forces at work in the property markets. Many people have suddenly come to the realisation that it is actually possible to work from home and avoid the office and commute, and this is already starting to have an effect on the market.
Rightmove, a property website in the UK, has reported witnessing a significant increase in the people looking for homes further from city centres and towns, with larger gardens as well as enough room to set up a home office. It might not be a permanent change, but coronavirus has certainly made people start thinking about how and where they work and live.
The changes have been far more dramatic when it comes to the commercial property sector, particularly on the UK’s High Streets.
Professor Michael White, an expert in real estate economics at Nottingham Trent University, says that retail has had problems for a long time and incomes are currently being hit by furloughs, which means that there will be a squeeze on spending in case of a recession. Floor plan drawing software and advertisements for houses will likely become less common too.
For the office space providers, if coronavirus ends up being a one-off hit, with only 2 quarters of rents deferred, property values are unlikely to be affected in any way.
Overall, the property market has 2 things in its favour even in these rapidly changing times.
The first one is that even if property prices were to fall, it may still be a good investment. It might sound perverse, but property is almost always a long-term investment, and not many are both secure and have good returns.
So, if government bonds have annual yields of 0.5 percent while the property market is making anywhere from 3 to 5 per cent, you will still have a good source of income if you are a global investment fund or private investor.