The Beginning of the End for Real Estate Prices?
Stock markets are racing from their March lows, but what are real estate prices doing? In past crises, the real estate prices tanked after default (bankruptcy) waves in the corporate and private sector, a jump in unemployment. This crisis can end similarly. For example, new data show:
Surprise! In annual terms, prices rose? In the middle of an ugly economic depression? Maybe real estate markets haven’t priced in the crisis yet. Is this only the beginning? It depends on how long the crisis will last. Another bad sign is, REITs (real estate investment trusts) and other real estate companies are reporting plenty of tenants don’t pay the rent. For example, Federal Realty Investment Trust is collecting only 50-60 percent of the rents.
Real Estate Prices in Europe Underperforming
Our chart shows the Dow Jones Equity All REIT TR index (REIT), an US index of the real estate investment trusts, and the Euronext IEIF European REIT index (REITE). For comparison, also the Nasdaq 100 index (NDX), the S&P 500 index ETF (SPY), and the broader European Stoxx 600 (FXXP) stock market index. The Nasdaq rose over eight percent this year, the S&P 500 is down six percent, and the European stocks fell 15 percent.
The REIT index underperformed the U.S. big-cap stock market with a 12 percent drop. While a 32 percent decline in European REITs is a more significant underperformance.
But support, a tailwind for real estate prices, can provide the ultra-easy policy of central banks. Through the persistently very low or negative interest rate level, the monetary base expansion, the asset purchases. This policy of the Fed, the Bank of England, the European Central Bank, and the Bank of Japan won’t change soon. The Fed is expanding, better, exploding the monetary base. Strong support for all real assets like real estate, gold, farmland, also stocks. (Also read: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?)
Conclusion? A High-Risk Industry
People lose their jobs fast in economic crashes, but usually many of them still have reserves. Employees and businesses also often receive government support. So, they can still pay the rent for months. An apartment, business unit, or workshop is often only endangered much later. The collapse of tourism can also generate selling pressure. Both in the hotel industry and by real estate units affected by the decline of bookings of Airbnb and other sharing services.
We don’t know how long the crisis will be and how deep. But property owners can still face longer suffering, much longer than 1-2 months. In the longer term, online retail businesses, online shopping may extend further and “brick-and-mortar” businesses shrink. (Brick-and-mortar means traditional street-side business, shops, offices, also banks. Offering products and services face-to-face in a physical store.) That may cause the decline of the demand for street offices, and a fall in all retail real estate prices.
The real estate industry seems perilous at the moment. Are all these risks priced in already?