The property market is undergoing a makeover.
Recently, two economists who predicted the Great Recession, Reinhart and Rogoff, sat down with the press for a series of interviews. Their task was to inform the world about the likely impact of the coronavirus on the economy — the biggest crisis in a decade.
The cachet of the pair are their exceptionally high economic circles, and the fact that they seemed to understand the dynamics of the last crash before anyone else. Back then, Reinhart and Rogoff argued that the economic downturn was severe but, fundamentally, similar to panics in the past.
When interviewers asked them whether this time was different, though, they responded that it was. Even these two staunch guardians of economic theory accepted that the impact of a pandemic on a modern economy was fundamentally unknown. How the dynamics will play out just isn’t clear at all right now.
The coronavirus is having a considerable impact on the property market, but not in the way that you might think. In a typical recession, banks get nervous and stop lending money to customers, fearing a long-term reduction in wages. In turn, buyers can no longer get big mortgages, and house prices have to come down. But, as Reinhart and Rogoff point out, this time is different. We’re not witnessing a credit crisis at all — at least not yet.
First of all, higher interest rates seem entirely off the table. The central bank has slashed primary yield to half a per cent and says that it will probably keep them there for some time yet. Second, that same institution is currently pumping the economy full of extra money in an attempt to support asset prices, which includes housing.
And on top of all this, the nature of the public health emergency is likely going to lead to an upsurge in property market activity.
The incentive to sell house fast is particularly strong among certain segments of buyers. We’re likely to see an uptick in the rate of relationship breakdowns from the quarantine. And mortality rates are higher than they would be usually, meaning that there will be more assets to distribute to benefactors.
How this will play out in the market is anyone’s guess. We are likely to see a glut of supply from the increase in Covid-19 deaths, but the increase in relationship separations may counteract this. At the same time, wages are falling and productivity slowing, which would typically harm the property market. But at the same time, the Bank of England is feeding credit into the system, which should buoy the market.
Perhaps the most significant change in the housing market will be where people choose to live. Covid-19 has made cities far less appealing. People live in large urban areas because they want to experience amenities and a sense of community. They want services at their fingertips. They don’t want to be at risk or exposed to disease or barred from going to public places. Cities, therefore, might see a decline in prices, and rural areas an increase. Housing might become more affordable for inner-city residents who stay.