The housing market is like the canary in the coal mine: as a larger economic downturn approaches, rates begin to decline. However, despite a deep global recession brought on by the coronavirus pandemic, property values have continued to rise in many countries this year. Discounts
This year, house price growth in the OECD club of rich countries has risen to nearly 4% on an annual basis, with even faster increases in Europe and the United States.
However, some financial experts believe it is only a matter of time before the pandemic's economic fallout catches up with Europe's booming housing market, particularly after several countries reimposed lockdowns to fight a new wave of infections.
“The pandemic is bad news for the housing sector in every way,” said Matthias Holzhey, a UBS economist and co-author of the firm's annual global real estate bubble index, which compares house prices in 25 of the world's most populous cities.
Mr Holzhey explained, "It is obvious that the economic recovery is still not happening, income is down, and rents are dropping in most cities, so your alternative to buying a house is getting cheaper." “The fundamentals just do not support a long-term housing boom.”
Despite all evidence to the contrary, this seems to be the case. According to OECD data, while the world experienced its worst postwar recession between the first and second quarters, house prices in the richest countries not only continued but accelerated. The third-quarter data is a little more shaky, but it mostly points to more development.
Government and central bank stimulus packages have helped struggling businesses, encouraged many employees to keep working, and, most importantly, kept borrowing rates near record lows, ensuring housing markets' resilience.
In the United States, declining mortgage rates and higher government benefits shielded the housing market from the pandemic, with prices that at a nearly 5% annual rate in the second quarter.
Much of Europe, especially Germany, the Netherlands, Portugal, and Poland, saw even steeper price increases. Prices in Russia have risen 15% as a result of government subsidies.
As housing prices continue to rise, the pandemic is causing some people to flee the city in search of more land. According to Halifax, detached house prices increased at twice the rate of apartment prices in the UK between March and September.
In France, Grégoire Kiss, a 42-year-old IT boss, and his wife Blandine recently sold their rented Paris apartment and purchased a Normandy farmhouse with their two children. “The trigger for us was when we got out of lockdown,” Mr Kiss said. “One of the positive outcomes of the recession has been that employers have made it easier for employees to work from home.”
According to research by Meilleurs Agents, such newly mobile employees leaving Paris may have led to a rare monthly drop in house prices in the region, which fell 0.5 percent in September, though they are still up more than 2% this year, having risen more than a third in five years.
“In the early days of the lockout, we found the rush, as 20% of Parisians went to work remotely in the countryside,” said Pierre Madec, an economist at the OFCE think tank in Paris. “Does this raise the question of whether we are prepared to lose 20% of Paris's population?”
House prices in Paris fell for the first time in a month. Bloomberg/Anita Pouchard Serra
Growing property prices are also causing concern in Germany, where the central bank recently stated that apartments in the country's major cities were 30% overvalued as compared to the long-term ratio of prices to rentals — though it added that this was due to rising land prices rather than any "destabilizing, speculative demand motives."
According to the German building industry association, the amount of land sold per year in larger cities has decreased by a third since 2012, although prices have more than doubled. Last year, the number of new apartments constructed in the country increased by 2% to 293,000, but this was still short of the 400,000 expected to meet demand.
Last month's €8 million selling of a 300 square meter apartment in Munich raised eyebrows, setting a new record for the region. Deutsche Wohnen and Vonovia, two German property developers, recently reached new 12-year highs in their stock prices.
It's easy to see why the market is booming, with Germans agreeing to 10-year mortgages at rates as low as 0.6 percent and some banks promising to lend 100% of the purchase price.
Jochen Möbert, a real estate analyst at Deutsche Bank, said, "We don't expect the German housing market to come down any time soon." “Yes, there will be dangers ahead. However, when investment funds reallocate money from financial markets to the housing market, we are seeing an influx of capital.”
According to the European Central Bank's latest quarterly survey of lenders, one concerning indication for Europe's housing sector is that banks are beginning to tighten their mortgage lending due to "risk expectations relevant to the general economic outlook."
In a recent paper, Citigroup economist Pernille Henneberg stated that a "lack of appetite for lending or tighter credit standards, due to concerns about borrowers' creditworthiness, may challenge the degree to which monetary easing affects the real economy."
Andrea Enria, the ECB's head of supervision, has previously voiced similar fears, predicting that the pandemic could leave eurozone lenders with an additional €1.4 trillion in bad loans, far exceeding the levels seen during the region's 2012 debt crisis.
Analysts expect that if this worst-case scenario occurs, the ultra-loose mortgage market will suddenly contract, bringing down house prices. “The eurozone is the biggest risk area,” said Mr Holzhey of UBS, adding that “it is time to sell out of property.”