Given the current crisis, it is challenging to know where to put your savings. But all is not lost – far from it. All the physical capital – like buildings and equipment – that make our economy function is still here. And that means that things will return to normal rapidly, once current events run their course.
In the meantime, though, we will see volatile asset prices. Markets will rise and fall as investors try to price in the new risk that a global pandemic brings.
For people looking to get into the real estate market, this is a massive opportunity. Here’s why.
Prices Will Fall
In the coming months, we will likely see property prices fall in connected, Western markets. Several factors will drive this.
- Lockdown. Overseas demand props up property prices in international cities like New York, San Francisco, and London. But with the current lockdown, people can’t physically move house. And that’s driving up supply, pushing down the price.
- Recession. Early economic indicators suggest that we’re heading for a massive slowdown. March unemployment claims spiked to over 3.3 million in the US – by far the highest in history. Production is down across the world. And most industries are in suspended animation. During recessions, prices and wages tend to fall across the board. And when that happens, it has a knock-on effect on the size of mortgage that people can afford. Eventually, that forces prices down as banks become reluctant to lend.
- Lower demand. The interesting thing about the current pandemic is that it is a dual supply and demand shock. People can’t get to work to produce goods and services. And, at the same time, they can’t leave their homes to go shopping for non-essentials. Lower demand in the housing market puts sellers in a tough position. Either they leave prices high and wait for the market to recover, or they slash prices to make a faster sale. Whatever happens, lower demand will mean prices will fall over the coming months.
It looks like house prices will fall. If that happens, it could be a once in a lifetime opportunity to get into the market. Real estate businesses may be able to mop up properties in affected areas at a discount, increasing their total return.
If we see high inflation and low-interest rates in the future, it could be even better for businesses that invest today. Not only will prices fall in the short term, but they’ll bounce back in the long-run, even if the economy is still stuck in recession. That’s a win-win.
Other Assets Will Perform Poorly
Right now, everyone is piling into assets like bonds to try to protect themselves from the carnage unfolding in the stock market. At least you’re only losing a small amount of money with a bond compared to lots of money in stocks.
Money managers, however, are forgetting that there is another type of asset that people can own: property. And it offers the prospect of a positive return going forward.
Investors and businesses don’t have to manage their portfolios either. Hiring a property management firm to take care of all the day-to-day admin makes it just as passive as owning financial instruments. And that’s a good thing!
It Doesn’t Tie Up Your Cash
If you want to buy a stock or a bond, you must first save up money from your income. In other words, you only take ownership of the asset if you pay the full price.
The same, however, is not true of property. Often all you need to do is pay the deposit and then get a bank to give you a mortgage to get the title to the house. In other words, you can take control of a lot more capital through borrowing than you can when you invest in the stock market.
You Generate Income Year-Round
A lot of countries are currently offering rent holidays – another reason why rental property prices will fall. But eventually, the time will come when renters have to make good on those payments. And when they do, it’ll mean significant returns for any residential property real estate business.
Remember, renters generate income year-round. And unlike commercial real estate, business disruptions are not going to shift rental patterns. Families will want to live in homes as long as there are people alive.
The current crisis, therefore, is presenting real estate investment businesses with tremendous opportunities. For many, it is not just a case of figuring out how to take advantage of them.