Real estate, dream or nightmare?

This crisis affected every sector of the economy. But one that might suffer and actually please a lot of people that are looking for an affordable home, is the real estate sector.

In the last few years, there has been a rise in home prices. For the most part due to the high demand and lower supply. Higher demand thanks to the booming economic conditions, low spreads, salary raises, and easier access to mortgages. And a low supply due to, at least in some countries, partially thanks to a boom in tourism, homes switched from long term renting to local touristic renting.

As a result of the pandemic, there was a sharp decline in tourism around the world, which left a lot of local small businesses high and dry. Consequently, a big part of these businesses is already considering the switch to long term renting. Might this happen, in the near future, the trend will reverse, creating an increase in supply.

Another consequence is the rise of mortgage spread rates, assuming the banks will restrict access due to the rise of risk. This happens because of economic uncertainty, which reduces risk tolerance, therefore increasing spread rates and having higher capital demands for people looking to finance themselves, hence, reducing the demand.

Photo by Maik Selbmann on Unsplash

Thus, we believe that the real estate prices might drop as a result of:

  • Reduced demand due to more restrictive credit access and diminished family income.
  • An increase of supply thanks to the switch from local touristic renting to long term renting.

Real estate, dream, or nightmare? A difficult answer, since if it’s true, it will become a nightmare to people and businesses who were profiting from some unrealistic prices, especially from clearly overvalued real estate. But now, it might become a dream for people who are seeking to buy an affordable home, or affordable rent, something fairer taking into account some low wages in certain parts of the world.

Logically speaking, if home prices drop, the ones who will benefit the most are the ones who have been saving for the last few years and are looking for an affordable home. In the long run, this crisis might inhibit the growth of sectors related to real estate, that in turn will without any doubt put a dent in the economy. The question is, do we a sustainable economic structure capable of bearing these market tendencies? Let’s hope so.

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