During the global recession a decade ago, real house prices fell an average of 10%, erasing trillions of dollars from the world’s largest asset class. While the real estate market wasn’t the cause of economic problems this time around, investors and homeowners were still preparing for the worst when it became clear that covid-19 would propel the world economy into the deepest downturn since the Depression of the 1930s.
That pessimism now looks out of place. House prices rose in most middle and high income countries in the second quarter. In the rich world, they increased by 5% annually (see Figure 1). Developer and real estate brokers’ share prices fell a quarter in the early stages of the pandemic, but largely rebounded.
Some markets are gushing. In August real estate prices in Germany were 11% higher than in the previous year; Rapid growth in South Korea and parts of China has led authorities to tighten rules for buyers. In America, median price per square foot growth accelerated faster in the second quarter of 2020 than in any three month period leading up to the 2007-09 financial crisis. Three factors explain this strength: monetary policy, fiscal policy and changing preferences of buyers.
First, look at monetary policy. Central bankers around the world have cut policy rates by an average of two percentage points this year, lowering the cost of taking out mortgages. Americans can take out a 30-year fixed-rate mortgage at just 2.9% annual interest, down from 3.7% at the start of the year. Studies suggest a strong correlation between falling real interest rates and higher property prices. Some borrowers can afford to take out larger mortgages. others find it easier to manage their existing loans. Landlords are willing to pay more for property as returns on other assets have fallen. Both America and the UK have seen mortgage lending at peak levels since the financial crisis.
That’s not to say that it has become easier for everyone to get a loan. In fact, it has become more difficult for many to get a mortgage. Brokers fearful of the long-term economic effects of covid-19 have withdrawn to riskier loans. UK banks, for example, offer fewer high-credit-income mortgages. In America, few bank loan officers said they had tightened lending standards before the pandemic. now 60% do it. In contrast to previous periods of strong house price growth, there is little evidence of lax lending standards.
Fiscal policy, the second factor, may therefore be more important in explaining the buoyant prices. In a normal recession where people lose jobs and their incomes decline, foreclosures push home prices down – not only by increasing the supply of homes in the market, but also by leaving ex-homeowners a mistake in their credit history harder for them to borrow again. But this time, governments in rich countries have kept household incomes. Handouts through wage subsidies, vacation programs, and expanded social benefits account for 5% of GDP. In the second quarter of the year, household disposable income in the G7 group of major economies was about $ 100 billion higher than before the pandemic, despite millions of jobs disappearing.
Other measures directly support the housing market. For example, Spain has allowed borrowers to suspend their mortgage payments. Japanese regulators have asked banks to postpone mortgage repayments, and the Netherlands has temporarily banned foreclosures. In the second quarter, the number of owned mortgage-backed properties in the UK was 93% lower than in the same period in 2019, driven by measures discouraging redemptions. America’s foreclosures as the percentage of all mortgages are at their lowest since 1984.
The third factor behind the unlikely global real estate boom concerns changing consumer preferences. In 2019, households in the middle OECD country spent 19% of their spending on housing costs. With a fifth of office workers continuing to work from home, many potential buyers may want to spend more on a nicer home. There is already evidence that people are upgrading their home appliances.
People also seem to be looking for more space – all other things being equal, this increases property prices. Although real estate markets in New York and San Francisco look weak, there is little evidence that people are fleeing cities for suburbs, at least in America. Data from Zillow, a housing market, suggests urban and suburban property prices are rising at about the same pace. Price growth in the areas where you really leave everything behind is actually slowing down (see Figure 2). People are more likely to look for larger houses near where they live. In the UK, single family house prices are increasing 4% annually compared to 0.9% for apartments and the market for houses with gardens is livelier than those without.
Can real estate prices continue their upward trend? Governments are slowly finalizing their economic bailout plans and no one knows what will happen when support ends. However, lower demand for housing could meet with lower supply. High economic uncertainties deter investment: In America, residential construction has fallen 17% since the beginning of Covid-19. The experience of the last recession shows that construction will lag even when the economy recovers. It can take more than the deepest downturn since the Depression to shake the foundations of the real estate market.