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An Unusual downturn


What happens to housing prices during an economic recession? If asked this question, many would say that the relationship is negative: rising unemployment and falling GDP implies lower housing prices. And they have a point; during the Great Depression of the 1930s housing prices fell by 25% (1), during the global financial crisis of 2007-2008 the average figure was 10% (2). Does this status quo hold during COVID-19? As widespread lockdowns aimed at halting the spread of the novel coronavirus were announced in March 2020, the equity sell-off was massive. The S&P 500 became a bear market and fell by 12% during the first few days of the month (3), despite tech giants like Apple and Amazon leading the subsequent rapid recovery. With the index actually growing overall in 2020, they were not the only ones; developers and property traders saw their stock value recover after falling by a quarter, and housing prices experienced a 5% rise in G7 countries (see Figure 2). The answer might lie in the actions of central banks and governments, alongside behavioural economics.



For instance, under the chairmanship of Jerome Powell, the Federal Reserve slashed interest rates, enabling the entry into a 15 year mortgage contract with a fixed rate of 2.7% in the second quarter of 2020, compared to a 3.46% figure for the same period in 2019 (4). Moreover, capital markets have proven to be an effective source of credit due to new instruments in monetary policy: the Fed purchased over $1.3 trillion of corporate bonds through its quantitative easing programme, hence allowing firms to increase capital expenditure. The increase in the money supply was extended even further: by buying $1 trillion of mortgage bonds (5), the central bank has prevented an increase of housing assets held for sale caused by a potential default in mortgage payments. Government spending in 2020 has been unprecedented; due to handouts and furlough schemes, the disposable income of households in G7 economies was $100 billion higher than before the pandemic (2). This has prevented a boom in houses held for sale while avoiding the deterioration of the credit history of many individuals, enhancing their future access to bank financing. The shift to remote working caused by widespread lockdowns has been a major trend in 2020. To illustrate this, Zoom, a communications technology firm, saw revenues skyrocket 367% (6). This seems to go beyond the pandemic, for example, Microsoft will allow its employees to work from home for up to 50% a week. Consequently, people started demanding bigger spaces for working from home, especially in areas away from city centres. In July, sales of big houses in the US experienced a 21.2% increase (7), which ceteris paribus, increases housing prices. That said, medium and small houses were not an exception: sales grew 10% and 2.3% respectively. The inflation in housing prices can be summarized with a basic economic rule: steady supply and increased demand. What should we watch out for? The housing market is indeed an exception to this downturn. Despite the hard work of governments and central banks to boost consumption and therefore prevent deflation, forecasts in the OECD expect inflation to not surpass the 2% benchmark neither in 2021 nor in 2022. However, $1.5 trillion dollars worth of stimulus remains unspent in the US (8), highlighting the possibility of a temporary increase in the CPI as vaccination allows for increased spending. Thus, housing prices could experience a further rise. It would be reasonable to expect low interest rates for the near future, and more government stimulus. This may therefore be a good time to think about getting a mortgage! References: 1.https://www.encyclopedia.com/education/news-and-education-magazines/housing-1929-1941#:~:text=Housing%20values%20dropped%20by%20approximately,reduced%20value%20of%20their%20home.



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