How will the property market pan out in the 2021 post-pandemic economy?
So, the main factors in the equation likely to impact both the commercial and residential property market include emerging macro trends, changing demographics, and, as one might expect, the state of the economy going forward.
The shape of the economic recovery is likely to have a sizable impact on the property market in 2021
But forecasting is a dicey business, so here are two opposing views on what the post-pandemic economic recovery could be.
“The shape of the economic recovery is likely to have a sizable impact on the property market in 2021”
Predictably, most real estate professionals have an upbeat forecast on the property market in 2021, which they base on a V-shaped recovery
In short, the property market bull view is that as COVID/19 vaccination is distributed, the economy will begin to open up, recover and that economic activity will return to pre-pandemic levels in late 2021-2022.
Those in the bearish property market camp argue that a K shaped recession is more likely
The COVID/19 vaccination will not cure the macroeconomic headwinds, which were in play before the pandemic, namely historic low worker participation rates, high debt levels, and waning consumption.
“the property market bull view is that as COVID/19 vaccination is distributed, the economy will begin to open up”
The property market bears, base their view on an economic recession in 2021, which cannot be dismissed easily
As the economy emerges from the pandemic, there is also a noticeable spike in small business failures, and that is resulting in higher unemployment. Moreover, business, public debt has hit all-time highs in most advanced economies. Meanwhile, the household savings rate has also increased, while debts for this segment have remained stable. But if consumption remains lackluster, in the post-pandemic economy, due to a decline in consumer sentiment, then a deflationary spiral into depression could also play out.
Meanwhile, tailwinds, such as favorable demographic trends could also support property market residential bulls
Millennials are turning 30, and younger Millennials and Gen-Z buyers are likely to play a growing role in the housing market.
So, the second, first-time homebuyers could keep the residential property market buoyant as the millennial generation enters the market.
“The changing political climate is also another factor influencing the property market” – Win Investing
The extent to which favorable demographics could have on the residential property market will depend mainly on the shape of the economic recovery
If an entire generation of aspiring property owners become uncreditworthy due to a lack of stable employment and they are unable to secure a mortgage, then favorable demographics are likely to have little or no impact on residential property market sales.
Moreover, this could add to risks in the residential rental market. If tenants are assessed to be not creditworthy by lenders, then how secure are their rent payments made to residential property landlords?
The changing political climate is also another factor influencing the property market
So Socialist governments, the vote for us, and you get everything free parties, favor policies that benefit tenants rather than owners with eviction bans and rent controls.
All this makes the buy to let property market, for investors, too risky and not worthwhile, bearing in mind that owners have the burden of maintenance costs and the likely higher property taxes from cash strapped governments.
Also, keep in mind that the millennial generation is the least wealthy generation, so this generation is more likely to vote in favor of Socialist governments.
Changing macro trends are also likely to have an impact on the property market
So, fourth revolution technologies and the push for the digitalization of everything means that land, as a factor of production, is becoming less relevant to a digital economy.
The modern office is rapidly becoming a private network of digitally connected workers located not in a physical office but cyberspace in remote locations.
“historically low interest rates could also be another tailwind for the property market in 2021” – Win Investing
The work from home, a macro trend, which has been turbocharged by the pandemic, is likely to have an adverse impact on the commercial property market
Companies and employees have now seen the cost-benefit from the work from a home model. So, we don’t believe it is just a fad.
Inventory soars as companies dump the record volume of office space.
Companies are unloading record volumes of office space onto the sublease market, according to FT.
Remote working, a macro trend, is likely to hit hard the commercial property market in 2021, even if, in the unlikely event, there is a V-shaped recovery
Bank of America, SalesForce, and Deutsche Bank are the latest companies extending remote working options.
What could also emerge is a hybrid model, which combines working from home and in the office.
The work from home, and or hybrid model are also likely to have an impact on the residential property market
The shifting geography of housing demand to lower-density markets is likely to continue in 2021.
So capital flows to more affordable lower density markets could accelerate in 2021, as the macro trend, work from home becomes the new norm.
Historically low interest rates could also be another tailwind for the property market in 2021
Given the large huge public deficits of most developed economies, the central banks are unlikely to raise rates next year. Moreover, if the economic recovery ends up to be anything but a V-shaped recovery, the central bank rates are unlikely to rise for the foreseeable future.
So commercial real estate is where we see the most turbulence in the property market due to the double whammy of the Amazon effect and the work from home cyber office
Viewed from a financial perspective this paradigm shift in the demand for commercial real estate potentially threatens $3.4 trillion-dollar commercial real estate debt via bonds, direct loans, and securitized loan bundles.
“I don’t see any way of avoiding a great deal of pain in the commercial real estate market in 2021. It is almost inevitable. My friends at the Federal Reserve and FDIC are becoming increasingly uncomfortable with what’s going on in the commercial real estate world, said Cam Fine, Former President of Independent Community Bankers of America.
So perhaps the property market will undergo a conversion from commercial to residential in 2021.