During the global recession of a decade ago, housing prices fell by an average of 10%, creating a loss of trillions of dollars worldwide. Although the housing market has not been the cause of economic unrest this time around, investors and homeowners are still preparing for the worst as it is clear that Covid-19 will lead the world economy into its deepest recession since the Depression of the years 1930.
During the second quarter of 2020, house prices rose in most middle- and high-income countries. The price of luxury properties rose at an annual rate of 5% .The stock prices of companies that manage real estate fell with a quarter in the initial phase of the pandemic, but the latter have recovered most of their financial loss over the autumn of this year.
During August 2020, house prices in Germany were 11% higher than a year earlier; the rapidly growing financial potential of South Korea and parts of China prompted authorities to tighten restrictions on buyers. In America, the average price increase per square meter accelerated faster in the second quarter of 2020 than in any three-month period recorded during the 2007-2009 financial crisis.
Three factors explain this strength: (i) monetary policy, (ii) fiscal policy, and (iii) altered buyer preferences.
Central banks around the world have cut interest rates by an average of two percent this year, lowering the cost of credit. Studies show that there is always a fairly clear link between lower interest rates and higher house prices. Borrowers are able to get more credit, while others can better manage their existing loans. Owners are willing to pay more for real estate as profits from other real estate typologies fall sharply.
This is not to say that it has become easier for everyone to borrow. In fact, getting a loan has become difficult. Banks, fearing the long-term economic impact of covid-19, have severely restricted high-risk loans. British banks, for example, are offering fewer mortgages. In America, there is evidence that since the beginning of the pandemic, a good number of banks have taken steps to strengthen lending standards.
Fiscal policy, the second factor, may be more important in explaining rising prices. In a normal recession, as people lose their jobs and their incomes fall, economic crises largely lower house prices - not only by increasing the supply of homes in the market, but also by leaving former homeowners with a non-assessment good in their credit history, making it harder for them to get loans in the future.
But this time governments in rich countries have subsidized household incomes. The distribution of wage subsidies, welfare schemes and extended welfare benefits amounts to 5% of GDP. In the second quarter of the year, household incomes in the G7 states were about $ 100 billion higher than before the pandemic, even though millions of jobs were lost.
Are prices expected to continue rising?
The Economist, 30.09.2020