What Coronavirus Will Mean for Property Investment in the New Decade

Coronavirus has had a huge impact on the economy over the past three months: the stock market plummeted, the Fed slashed interest rates, mortgage rates rapidly fluctuated, and record numbers of Americans had to apply for first-time jobless claims as businesses shuttered and millions found themselves temporarily out of work.

In the short term, all of this uncertainty will undoubtedly have an effect on the property market, but real estate investments are usually undertaken with a long-term view, rather than aiming for short-term gains. So what will the post-coronavirus world possibly look like for property investors?

Demand will continue to outstrip supply:

Supply of affordable housing has been a hot-button issue over the past few years - estimates say that roughly 1.5 million new houses must be built annually in America in order to keep up with the growth of demand - and coronavirus will potentially exacerbate this problem. In areas like Metro Detroit, experts were predicting at the beginning of the year that real estate values would perform well in 2020, due to a shortage of supply and not enough new construction being built. Now property developers have lost access to the materials and workforce needed to push ahead with building projects and sellers are temporarily taking homes off the market, squeezing the supply even further. However, keeping an eye on contractors’ plans will tell us whether or not this will impact supply in the long run. If developers start cancelling big projects, that’s an indication that the housing supply could shrink even further in the coming years.

There might be more demand for rental properties:

If coronavirus leads to sustained unemployment, even with public stimulus packages, the economy could be pushed further into recession, as consumer spending decreases. This could translate in the short term into people delaying home purchases due to lost income or uncertainty in the market, making the numbers of renters increase. In the long term, the rental market is expected to recover once the crisis passes, with forecasts showing the number of tenants increasing by 1 million every year, and rental prices continuing to steadily rise. The demand for certain types of rental properties will also likely shift in the future, with some renters choosing to make a permanent lifestyle change to SFR instead of multi-family due to heightened concerns about potential health issues.

House prices will continue to increase in the long term:

Most of us associate an economic recession with falling house prices. But the situation today is not the same as it was in 2008: if we enter into a recession, the price of homes could actually increase, as the already-limited supply of affordable housing dwindles even further. Furthermore, as interest rates decrease, mortgages become attractive to new buyers, driving up both demand and house prices. In the short term, real estate prices are likely to drop as buyers delay their purchase plans. Realtor.com’s data shows that house prices have continued to increase during the outbreak, although price growth has slowed significantly in the past few weeks. In the long run, experts believe prices will start to increase again once a vaccine is created and the job market returns to normal.

The short-term impact will be felt differently in different markets:

Real estate markets are highly localized, so each region will experience the effects of the pandemic differently. Current predictions suggest that areas which already had a strong property market at the beginning of 2020 will recover well over the coming months. Areas which were already at-risk prior to the outbreak may fare worse, as tenants struggle to pay rent and more homeowners are forced into foreclosure. Rental income from class “C” properties will be particularly vulnerable in a prolonged recession scenario, but the effects of the crisis could be mitigated by an increase in the demand for affordable rentals.

‘Dry powder’ will be more important than ever:

One thing the coronavirus pandemic has highlighted is the need for investors to maintain excess cash reserves for use in times of economic downturns. A recent PwC report suggests that over the next decade, investors should look to have more highly-liquid assets to cushion them against capital expenditures and potential reductions to net operating income (NOI) in the event of another crisis. This is particularly true for real estate investors in the retail and tourism sectors, the markets which are most vulnerable to the effects of global travel restrictions and community lockdown measures.

Before the coronavirus pandemic shook the economy and the real estate market, most experts were forecasting that housing prices and rental rates would continue to rise steadily. While it’s too early to predict exactly how markets will respond over time, it seems that the effects on property investment will be limited in the long term. Prices are unlikely to plummet as they did in 2008, and although housing supply will remain limited, the number of buyers may also shrink in the short term, putting potential investors with ready capital in a better position to buy.

Most commentators also anticipate an economic resurgence in the second half of 2020 or in 2021. While there will be added challenges for property investors, particularly for beginners who are navigating the real estate market for the first time, there will also be opportunities for investors with the patience to see beyond the crisis to position themselves for success in the next decade.