Vaccine will not provide a quick fix for real estate - Capital Economics
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Vaccine will not provide a quick fix for real estate

US Housing Market Update
Written by Andrew Burrell
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News about a vaccine has boosted financial markets and we have revised up our global economic expectations for the next two years or so. But while we think that this bodes well for the medium term, next year is still likely to be tough for most property markets.

  • News about a vaccine has boosted financial markets and we have revised up our global economic expectations for the next two years or so. But while we think that this bodes well for the medium term, next year is still likely to be tough for most property markets.
  • While there are still short-term economic challenges, the news of several effective vaccines has led us to revise up our world GDP growth forecasts for both 2021 and 2022. The positive effects will be most pronounced in developed markets, notably the UK and euro-zone, though activity will still not return to its pre-virus path over the next two years in most economies. (See here.)
  • Property has weathered the year’s economic storms fairly well. Not only that but the latest data indicate that for sale residential markets are rebounding (see here) and that the correction in commercial property looks milder than we once feared, notably in the US (see here). And this was before the news of the vaccine. But we think this good news may still not provide as strong a real estate rebound as some expect.
  • One reason for this is the labour market outlook, as a driver of housing and of office markets. Here, we expect unemployment to rise further even after GDP rebounds. These effects are especially important in the euro-zone and the UK where widespread support remains in place. The ending of the UK furlough scheme next March, for example, means that housing markets, already hit by the end of a temporary stamp duty holiday, are likely to suffer a hangover later in 2021. (See Chart 1 and here.) And while we expect weak employment will weigh less on office sectors, it will still dampen occupier demand well into next year.
  • Other measures will also drag on the recovery in 2021. In 2020, widespread eviction bans contained property market distress, but also led to rent arrears. As bans are relaxed, landlords will seek redress, increasing pressure on occupiers, which in the worst cases will result in tenant failures and rising vacancy. More generally, company insolvencies have been supressed, but there will eventually be an upturn. Again, this implies more vacant space. And these effects will put more financial pressure on banks, who may be less willing to offer forbearance or extend emergency credit.
  • Another factor that will weigh on property is structural change. As our Future of Property research has highlighted, potentially lasting negative effects on office, retail and urban residential demand will be a legacy of COVID-19. So we expect an offloading of office space, and brutal restructuring in retail to dissipate some of the cyclical momentum in these sectors.
  • Admittedly, there may be upside to investment activity if confidence surges. And a stronger economic recovery may also bring a boost elsewhere, notably in industrial, leisure and hotels. But on balance, these are unlikely to provide sufficient offset. So, although this year has surprised on the upside, most commercial and housing markets will see flat or falling prices next year. (See Chart 2.) Within this range, we expect US markets to emerge strongest, while the UK is expected to lag.

Chart 1: House Prices UK and US (% y/y)

Chart 2: All-property CV Growth (% y/y)

Source: Refinitiv, CE

Sources: MSCI, CE


Andrew Burrell, Chief Property Economist, +44 (0)7985 902 151, andrew.burrell@capitaleconomics.com