The Covid-19 economic shock is having a material impact on the real estate market through multiple channels. Rising unemployment is affecting individuals’ ability to pay rent and mortgages. The lockdown measures adopted by many governments are exacerbating pre-existing vulnerabilities such as overcrowding, the quality of dwellings, connectivity challenges, domestic violence and homelessness. These can have long-lasting effects on health disparities, economic inequality and social mobility. Low-income households are more likely to live in overcrowded and low-quality homes, and adolescents in low-income households are less likely to have good internet access, especially in developing countries.
In response, many governments have taken support measures. According to research from DIW Berlin, 44 countries have planned or enacted eviction bans. More than 30 have granted mortgage relief, with many more privately agreeing to do so in the future. Over 20 countries have introduced rent freezes and subsidies.
These actions have helped ease the immediate pressure. To ensure the support remains effective and on a sustainable path after the crisis, policy-makers may want to think about the following.
- Focus not only on action, but also on its effects
Throughout the pandemic, the focus has rightly been on action. Governments have prioritised allocating resources into designing and implementing policy. But it is equally – if not more – important to also put resources towards measurement and evaluation. Collecting data and making them available in a format that can be used by governments, banks and civil society is essential in order to assess which policies are working most effectively. Policy-makers will need to tread the fine line between this and the principles of data protection regulation, such as Europe’s general data protection regulation, which may complicate the assessment process.
- Keep an eye on debt, but worry mostly about growth
Large-scale government interventions have unsurprisingly invited concern about debt sustainability. At an OECD roundtable on housing policy last week, policy-makers recognised that debt can hamper their willingness and ability to support these measures. Debt levels are rising for households, businesses and governments, and will continue to do so. However, assessing debt sustainability is a more nuanced exercise. Even the crude debt-to-GDP measure is made up of two parts: debt and GDP. Housing policies that support the recovery can be effective in cushioning the drop in GDP, therefore making debt more sustainable than it would have been otherwise.
- Focus on demand, but don’t forget about supply
The crisis in the real estate market is so far mainly driven by a negative shock in demand. Businesses are going under and vacating premises. People are losing their jobs and cannot afford to pay rent and mortgages. But as we look ahead to the post-Covid period, supply can become an issue. If, as the economy recovers, demand exceeds investment, this can lead to continued pressure in housing availability and affordability, at a time when it will be needed most. Supply chain disruption can affect the availability of housing materials, while continued constraints on peoples’ movement can limit the availability of skills needed in the building market. A relaxation of immigration rules and associated political tensions could follow. On the other hand, new realities and patterns of leisure travel can have structural effects on the housing supply in urban areas, and partly reverse the trend that saw short-term accommodation platforms, such as Airbnb, drive private renters out of urban centres.
- Beware of bubbles (but worry mostly about growth)
Similarly to concerns about government stimulus keeping ‘zombie firms’ alive, housing support policies risk inflating markets that, before the pandemic, displayed elements of a bubble. Policy-makers will need to find the balance between keeping these under control to be able to deflate them in the post-crisis period, and avoiding the risks to financial stability from sudden busts during the crisis. Whether they are successful will ultimately depend on the shape of the recovery and the balance of inflationary and deflationary pressures in action. Accommodative central bank and government policies are supporting asset prices, and uncertainty over the inflation outlook has increased. But unlike in previous crises, rates are very likely to remain low for longer due to structural shifts in the economy.
- Plan ahead for the new normal
Consensus among epidemiologists and the wider scientific community suggests there is unlikely to be a vaccine before mid-2021. But while uncertainty around the permanence of the situation matters for designing immediate policy responses, equally important is considering which features of lockdown life may become semi-permanent. With many businesses forced to test models of employees working from home en masse, this could lead to a more widespread practice with permanent effects on commercial real estate. As people change their behaviour and customs and become more alert to the risks of living in concentrated urban centres, the relative appeal of the city centre versus alternative structures for housing and urban development may shift too.
- The climate crisis is with us for the long run
Big structural shifts in economies and societies can act as opportunities to change things for the better. For the real estate market, a major aim for the longer term should be alignment with sustainability objectives. Affordability is one important variable. Another is energy efficiency. Policy-makers should encourage and support innovations such as the mortgage financing mechanism proposed under the Energy Efficiency Mortgages Initiative, which seeks to incentivise borrowers to improve the energy efficiency of their properties. Banks need to be given the right incentives and disincentives to make this happen. There will be a temptation to delay and suspend prudential measures aimed at addressing climate risks to ease pressure on a struggling financial industry. Policy-makers should think hard about the risks for the future before considering yielding to such demands. At a time when governments are issuing huge stimulus packages, they have an opportunity to attach climate-minded strings to the support they offer to prevent another crisis.
Danae Kyriakopoulou is Chief Economist and Director of Research at OMFIF. This is a summary of remarks delivered at the OECD policy roundtable on housing policy responses to the Covid-19 Crisis, more details and background research from are here.