House prices typically fall sharply in recessions. Yet despite record drops in GDP during 2020, property prices – from the UK to the US, across China and Russia, from Poland to the Philippines – have risen, in many cases to record or near-record levels. How long can this last?

Record low interest rates are one reason housing has apparently defied gravity: even a small cut in mortgage costs can encourage renters to buy or existing owners to upsize.

However, savings rates have fallen too. With spending limited by lockdowns, people have saved more but some cash-rich savers see property as an attractive alternative – either as a home or, especially in emerging countries including the Philippines, as an investment.

This recession has affected different groups differently. Most home-buyers have to be relatively high earners, and while incomes of many people worldwide have collapsed, most prospective homebuyers’ earnings have been relatively unaffected.

The virus forced many to work from home and remote working, at least part-time, may become the norm. Some homebuyers have thus brought forward plans to move out of cities to larger homes with gardens. But this has pushed down rents in many places: in Manhattan, increased vacancies have cut rental costs by 11 per cent.

Also, some governments have supported housing demand. The UK, Egypt and Malaysia have reduced stamp duty on purchases, for instance; Australia and Thailand relaxed lending regulations; Turkish state banks are providing very cheap housing loans; Russia's preferential mortgage scheme saw borrowing rise 40 per cent, pushing up property prices. And state income support has kept housing markets buoyant in countries including Canada and Norway.

Meanwhile the pandemic halted housebuilding in countries, and despite some recovery, restricted supply could support prices in the coming year.

But what next? Most central banks are expected to keep interest rates at record lows until at least 2023 but mortgage rates could start to rise, particularly for higher loan-to-value loans, and mortgage availability could shrink, putting downward pressure on the housing market.

And while the recession has so far mainly affected low-income households, job losses could extend to white-collar roles.

Further, if this year’s enhanced demand is simply people accelerating their future plans, that may mean reduced sales in 2021 or 2022.

Countries must decide whether to continue supporting housing markets. Home-movers support the wider economy by buying furnishings or decorating and strong house prices boost consumer confidence – but governments face other spending priorities. Encouraging more household borrowing may also be unwise.

The factors that have supported house prices are thus likely to wane, putting downward pressure on house prices in much of the world.

For central banks, raising rates while growth is weak and inflation is below target is extremely unappealing: keeping borrowing costs low will remain top priority. So if house prices keep rising, central bankers may turn to macroprudential policies such as loan-to-value limits, leverage ratios, or countercyclical capital buffers – even if past experience suggests such policies may not have had the desired effect.

First published 16 October 2020.

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