Not long ago, real estate professionals were bracing for the worst.
The coronavirus pandemic had shut down large parts of the world, causing the closure of businesses, the loss of tens of millions of jobs, and a deep freeze in the housing market. As the global recession took hold, the number of people requesting additional time to make mortgage payments increased dramatically.
“We thought it was going to be 2008 all over again this time last year,” said Kate Everett-Allen, head of international residential research at real estate consultancy Knight Frank.
The fear was that house prices would plummet, as they had consistently done during previous economic downturns. Increased bankruptcies and unemployment would eat away at disposable income, making it more difficult for highly indebted homeowners to keep up with their mortgage payments.
Those fortunate enough to own second homes would be forced to sell in order to accumulate cash reserves, further depressing prices.
“In fact, none of that occurred,” Everett-Allen added.
Rather than that, house prices increased despite the world experiencing its worst slump since the Great Depression. The same phenomenon has taken hold across the globe, from New Zealand to the United States, Germany, China, and Peru: home prices are skyrocketing, and many buyers are panicking.
Between the fourth quarters of 2019 and 2020, real house prices increased by nearly 7% across the Organization for Economic Cooperation and Development’s (OECD) 37 wealthy member countries — the fastest year-on-year growth in two decades.
Is this a bubble on the verge of collapsing? No, Everett-Allen asserts. Borrowing costs remain low, and once borders reopen, foreign investors will inject additional momentum into property markets, which have been largely driven by domestic buyers, she said.
“That will unfold over the remainder of this year and next, and then there may be a period of relative calm,” she added.
In a surprising development, the pandemic has benefited housing prices.
That is because governments worldwide aided homeowners by temporarily prohibiting foreclosures and providing trillions of dollars in assistance to workers and businesses. In many markets, interest rate reductions kept mortgage repayments affordable, while temporary reductions in purchase taxes stimulated home buying.
These measures mitigated the effects of the coronavirus recession on the housing market. However, the pandemic has accelerated price increases.
“When the vast majority of the population is imprisoned for months, they (rapidly reassess) what they want from their homes,” said Richard Donnell, research director at UK property platform Zoopla.
As people were forced to convert their homes into offices and classrooms, a “race for space” quickly developed.
Wealthier individuals in several countries have fled cities in favor of larger suburban homes with more outdoor space in the hope of reducing their reliance on central offices even after the pandemic is over.
Many of them are in a better financial position than they were prior to the pandemic, as they have cut back on vacations and dining out, allowing them to spend more on home purchases.
For example, in the United Kingdom, commuter towns such as Bishop’s Stortford and Winchester have seen a surge in property values.
According to Daniel Harrington, international head of growth at upmarket estate agent Fine & Country, anything with a home office within an hour train ride of London is selling for 10% above market value.
In capitals such as London and Paris, Harrington has observed wealthy executives trading their centrally located homes for something larger but less expensive further out of the city, leaving them with enough cash to purchase a small apartment downtown and a vacation home elsewhere.
This has increased domestic demand for property in traditionally foreign-dominated areas such as the French Riviera.
Lee Hussell, director of estate agency Webbers in the seaside resort town of Ilfracombe in southwest England, recently sold two properties for £100,000 ($A182,000) more than the asking prices.
“In 38 years of buying and selling homes, I have never seen a market like this,” said Henry Pryor, a buying agent in the United Kingdom. “There have been reports of buyers paying upwards of £10,000 ($1A8,000) to view a property.”
With inventory levels approximately 30% below normal in the United Kingdom, people are “panic-buying properties,” Pryor added. Since November, transactions have been above average in every month, with March recording 180,000 sales, nearly double the average for the same month over the last two decades.
“Twelve months ago, people were panicking about running out of toilet paper. That is very much the sensation we are experiencing right now (in the housing market),” he explained.
House prices in the United Kingdom increased by 8.5% in 2020, despite the worst recession in over three centuries. According to the Office for National Statistics, this is the highest annual growth rate since 2014.
And this is not limited to the United Kingdom. According to the National Association of Realtors, existing home sales reached their highest level since 2006 in the United States in 2020.
House prices increased by 9% in 2020 and have continued to rise, with the median price of a previously owned home reaching a record high of $A426,000 in March.
Within three days of listing a $A357,073 fixer-upper in suburban Washington D.C., realtor Ellen Coleman received 76 all-cash offers. The four-bedroom, 167-square-metre property sold for $A596,000, a 70% premium over the asking price.
House prices appear to defy gravity from Auckland to Shanghai, Munich, and Miami.
According to Michael Heming, master licensee for Fine & Country in Germany, Austria, and Switzerland, properties are selling within two weeks of being listed.
“It’s an extremely strong market, and prices continue to rise,” Heming told CNN Business.
Foreigners have been snapping up houses in Portugal despite their inability to inspect the properties they are purchasing. According to Knight Frank data, prices increased 6% in the fourth quarter of 2020 compared to the same period a year earlier.
Despite the absence of buyers from traditionally strong markets such as Brazil, the United Kingdom, France, and Belgium, the first three months of 2021 have already surpassed sales records, according to Charles Roberts, managing partner of Fine & Country Portugal.
“We have sold a significant amount of that blind,” Roberts said, adding that foreign buyers desire fresh air, open space, and a picturesque bolthole to retreat to during the next pandemic. “When travel resumes, I believe we’re in for three months of mayhem.”
He recently sold an apartment in the coastal town of Cascais, just west of Lisbon, for €3.5 million ($A5.5 million) to a South African who had never been to the town.
In India, prices have fallen following a 6.9% decline in GDP last year, but transactions have soared since the first lockdown ended.
“COVID resulted in a resurgence of activity in the market,” said Hitesh Oberoi, CEO of Info Edge, which owns India’s largest real estate portal, 99acres.com. “Many people desire larger homes,” he continued. “Many people believed that because the economy was collapsing, they would score a bargain.”
Oberoi added that while falling interest rates and lower transaction taxes have aided the economy in some parts of the country, the market has slowed again as India battles a devastating second wave of the virus.
Governments take action to cool the markets
Governments in a number of countries are already examining ways to prevent their housing markets from overheating.
In New Zealand, where median house prices increased more than 24% year on year to a record high in March, the government is under pressure to stabilize the market, according to Wendy Alexander, acting CEO of the Real Estate Institute of New Zealand.
In March, the government announced a series of measures aimed at “cooling investor demand” and slowing the rate of price growth, Alexander explained. For instance, tax loopholes have been closed and ministers are considering tightening restrictions on interest-only loans to speculators.
In China, where house prices in “tier-1 cities” such as Beijing, Shenzhen, Shanghai, and Guangzhou increased by an average of 12% year on year in March, “Beijing is more determined than ever to rein in property leverage,” Societe Generale analysts wrote last week in a note.
“More than 30 cities, accounting for nearly a fifth of total national sales in 2019, have implemented significant tightening measures,” Michelle Lam, Societe Generale’s greater China economist, said.
“These include restrictions on buying and selling, credit, increasing the holding period for tax exemptions, and closing loopholes created by phony divorces,” she added. Historically, some couples have sought divorce in order to circumvent family property ownership caps.
Even with tighter restrictions, Societe Generale analysts anticipate a modest correction in house prices in China, owing to continued favorable lending conditions, robust demand for urban property, limited supply in top-tier cities, and persistent interest in property investment.
Banking regulators in other countries may also tighten mortgage lending rules to cool markets, according to Matthias Holzhey, head of Swiss real estate investments at UBS, who sees regulation more broadly as a threat to house price growth.
For instance, policymakers could increase taxes on land and transactions, particularly as governments attempt to repair their public finances in the aftermath of the pandemic.
Why the boom is unlikely to come to an end
However, even as governments focus their attention on the housing market, analysts do not anticipate a correction in house prices.
Global economic growth is expected to accelerate significantly this year as vaccines are introduced and lockdown restrictions are eased, which will benefit housing markets.
Notably, interest rates are expected to remain low in the coming years. “Historically, periods of depressed house prices have been preceded by periods of rising interest rates,” Holzhey explained.
Rates at historically low levels have been a significant driver of inflation, particularly in the United States and Europe, as they make borrowing more affordable. Mortgage rates in the eurozone’s 19 member countries averaged just 1.3% in March, according to official statistics.
Despite rising inflation, policymakers are expected to maintain low interest rates in order to safeguard the recovery. They may have to adjust their strategy if prices continue to rise and remain stable at higher levels, but major central bankers have been careful to emphasize that they are comfortable allowing their economies to run hotter than normal if doing so helps boost growth and create jobs.
“For the next couple of years, mortgage rates will remain structurally low and supportive of market growth,” said Adam Challis, Jones Lang LaSalle’s executive director of research and strategy for Europe, the Middle East, and Africa.
In other words, do not anticipate this boom to end soon.