Market Speculation: Is the Housing Market Set to Boom in 2021?

2020 has been a rollercoaster of a year, to say the least, we have become accustomed to a new normal riddled with uncertainty. Our lives have drastically changed and we are wondering if things will get back to how they were before. The housing market has been no exception to this uncertainty and change, we’ve seen house price growth slump across the globe leaving many of us wondering whether 2021 is going to be the year that house prices bounce back.

 

Pre-Covid

Firstly it’s important to consider the fundamental factors that set house prices. Starting from a simple stance of supply and demand we expect prices to reflect the incomes based in an area or commutable from that property. This is called the income bid-price spread and has been the dominant traditional theory widely recognized by economists. That is that as more jobs there are in an area the more people there are with money to purchase housing. Another big factor affecting house prices that we’ve seen play a part, especially in recent years, is interest rates and access to finance. Again acting on the demand side of the equation in a similar way is that as people have access to mortgages they can afford to spend more on a house which pushes prices up. When interest rates are lower it makes larger loans manageable on lower incomes than previously would be as the monthly repayments get smaller.

 

United States housing stock has always been seen as a pretty safe deposit of capital by foreign entities, particularly those from unstable currency areas and those living with political risk. As long as this is true there is always going to be pressure supporting the housing market. The dollar being the global reserve currency, highly liberalized financial markets, and loose capital controls make American assets attractive. When the dollar loses value against other currencies it makes the price of American assets cheaper to foreign entities too, so those from abroad who were thinking of buying a second home in America will find their money goes further. Experts generally believe that even with these influences and distortions the overvaluing of real estate in the United States is modest at best.

 

Covid effects

As social distancing has been made paramount to prevent the spread of the virus the move to working from home has been accelerated at an unprecedented rate. The fact that a large volume of the workforce now no longer need to live anywhere near their place of employment spells a huge structural change in demand for housing. The suggestion is that prices in urban centers that host high concentrations of well-paying office work are going to see their value stagnate and fall relative to the rest of the market. As many people are laid off demand falls, businesses are delaying investment until there is some certainty too corporate purchases of property are being delayed which in turn dampens down demand. Since the global financial crisis banks have had their lending rules tightened and restrictions placed on how precariously they can balance their position. Chiefly relevant to house prices is the lack of leverage and risk of default now relatively absent compared to 2008 we can assume that a serious crash is very unlikely.

 

It’s hard to see a clear reflection of the effects to some extent as the volume of transactions slowed down during the height of the lockdown and would probably have been biased towards the distressed quick sales required by those hardest hit by the pandemic.

In the United Kingdom, the Chancellor of the Exchequer Rishi Sunak granted a tax break on the stamp duty paid on house sales on the first £500,000 ($646,000) of the property’s value to address the slowdown on the other side of the pacific. Famously the legal red tape and bureaucracy can make transactions very expensive to implement and any cutting back of this would help the market without making anyone worse off.  In any case, the housing market is structurally changing and new types of business are booming the house guys in Washington DC take advantage of a relator free model to name just one-way value can be added to property without commissions sucking money out of everyone’s pockets.

 

Post-Covid

Moving forward it is hard to know how much of the investment that could not happen because of lockdown is an investment that has been delayed or has been canceled because it could be the case that a large amount of activity has been pent up only to be released in 2021 in a similar fashion to what happened after the financial crash. On both sides of the equation, there are multiple factors pushing house prices both ways. Nobody intelligent can conclusively say which forces are stronger and ultimately predict a movement either way.

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