Europe seems to have got through the first wave of the pandemic and the mitigation measures had worked fine. Imposing lockdowns for two months will bring new challenges in the next two years, but for now, a reflation period seems to be starting, with the recovery potential very high, given the extremely depressed economic conditions. I am Ofir Eyal Bar and today I want to go over a brief analysis of the European real estate market in the aftermath of COVID19.
Rental market the least affected
This pandemic had been a real shock for the society and its economic impacts had been profound. Rising unemployment, lower consumption, and lower incomes will continue to act as a deflationary pressure. Although there will be broad consequences on the real estate market as well, the rental market looks to be the least affected. People and companies are not eager to buy a property, given the increased uncertainty, so rent will be the best short-term solution. Analysts believe there is latent demand in the market, which will start to show now that lockdowns are gradually reduced.
Increased pressure on real estate valuations might lead to a drop in rental prices, a factor that should facilitate a pick up in demand for rental properties. How fast it will happen depends on the risk factors discussed in the last section, but the overall rental market prospects are encouraging at present.
Dip in new home purchases
Unfortunately, things don’t look so bright in the home purchases sector. Although healthcare, tech, biotech, and other related industries had not been affected by the pandemic, that’s not enough to outpace the slowdown in consumption, industrial sector, travel, and tourism. As compared to the end of 2019, fewer people and companies have enough money to spend on real estate acquisitions. At the same time, the real estate market was at the top of a cycle which started in 2009, right after the financial crisis.
Naturally, downside pressure on housing prices will follow in the near term, which will be a positive catalyzer viewed from a longer-term perspective. The only positive factor for the sector is represented by lower mortgage rates. Central banks had to use extraordinary policy measures once again, leading to a drop in interest rates all around the world. With mortgage rates near record lows, it may be possible people will be motivated to benefit from this unique opportunity. I would be cautious for now, since taking on a 30-years loan is a difficult decision and when your income drops, this isn’t the wisest approach.
Adapting to the new normal
What’s important to note, though, is that companies from the real estate sector are already finding ways to adjust to post-pandemic conditions. Social distancing measures are still in play, which means they must find ways to reach customers. The use of video walkthroughs is on the rise and helps consumers shortlist properties from the comfort of their place. This crisis had forced all industries to embrace technology more broadly as part of the new normal we must get used to.
Risks to the downside to weigh
Moving ahead, the road might be bumpy given a series of risk factors. If either of them will materialize, the recovery in the real estate sector will take longer than it is estimated now. The first and most important risk is represented by a second wave of infections. Even though no new lockdowns will be imposed, governments across Europe will need to take drastic measures again to contain the spread of the virus. Unfortunately, it is statistically proven pandemics come in cycles. Epidemiologists advise us to start getting used to this virus because it will be with us for a while.
Secondly, solvency issues for companies affected by economic contractions should be a great concern. During an economic downturn, defaults occur among companies with unsustainable business models. Would this time around be an exception given central banks had flooded the markets with liquidity? Their actions had alleviated pressures for the short-term, but in the long run, monetary policy can’t be the only game in town.
As it can be easily noticed, the real estate picture for the European market is quite mixed.
I’m Ofir Bar and this was my analysis, I hope the information shared will be useful for you.