Prices of Weekend Homes in Croatia, Spain, and Italy Could Particularly Fall

Most countries expect stagnation in real estate prices or slight changes before they begin to rise again in 2021 or 2022, according to research on the impact of the COVID-19 pandemic on residential real estate. Attractive land for foreign investors includes Luxembourg, Belgium, and the Netherlands, while a significant market decline is expected in the United Kingdom and Hungary. Traditional summer destinations will also feel negative effects.

After several years of growth in all segments of the residential real estate market, this was also expected in 2020. However, at the end of December 2019, a new strain of coronavirus, originating from China, began to spread worldwide. In February and March of this year, the pandemic hit most European countries, forcing them to impose restrictive measures on their economies and the free movement of citizens. This affected both the residential real estate market and the rest of the economy. Numerous experts believe that the economic crisis that will follow the pandemic will be the most severe since the Great Depression.

However, from the perspective of the residential real estate market, the new crisis differs from the one that hit us from 2008 to 2010. The previous crisis was caused by the negligence of banks in financing real estate and the subsequent trading of credit derivatives. Today’s economic downturn was triggered by government decisions made to prevent the spread of COVID-19 caused by the SARS-CoV-2 virus. Banks and developers are in better financial condition than at the onset of the previous crisis. We asked real estate market experts from twenty-three countries participating in the survey to share their opinions and observations on the current effects of the coronavirus on residential real estate markets and how these markets will develop in the coming months.

Differences Due to Varying Stringency

In the previous crisis, we witnessed a significant decline in construction activity, many developers faced financial problems, and most projects were halted. As a result, in the years following the crisis, the least number of residential properties were started and completed, which, combined with low financing costs and economic growth, led to an increase in residential real estate prices across Europe and an increased shortage of residential properties in several countries. Our experts claim that in the case of a prolonged economic downturn, we can expect a similar situation in some markets.

However, developers are today in a better position to face complications, and although there may be slight delays in approval and construction processes, there must not be significant slowdowns in the economy to protect the residential real estate market. State aid in the form of guarantees or direct financial engagement will play a crucial role in mitigating this inevitable danger. Immediately after protective measures for the economy were introduced in the countries participating in the survey, residential real estate markets in most of them came to a standstill. Most transactions in progress, especially those in earlier phases, were temporarily halted. Almost no new contracts were concluded as personal property viewings were nearly impossible. Some countries recorded an annual decline in transactions of up to eighty percent. The impact on construction activity varied among countries depending on the stringency of protective measures. For example, in France, work on ninety percent of construction sites was halted, while in the Czech Republic, workers only had to adhere to additional hygiene rules. Furthermore, a lack of labor could become a problem for construction work, especially in countries where construction workers are foreign workers who returned to their home countries after the emergence of the coronavirus.

Six Negatives

The rental markets in most countries participating in the survey responded the fastest to the new market circumstances. Particularly in large cities such as Paris, Rome, Prague, or Budapest, restrictive measures halted the influx of tourists, and many apartments in the city center, originally offered as P2P accommodation units, became part of the long-term rental market supply, creating pressure to reduce rental prices. However, we cannot conclude with certainty whether these accommodation units will again become part of the short-term rental supply after the recovery of tourist activities.

The development of the real estate market across Europe varies from country to country. In 10 out of 23 countries participating in the survey, stagnation in the real estate market is expected, meaning stagnation in prices and a decline in the number of transactions. When it comes to price development and overall market activity in the future, experts from six countries have negative expectations. These are countries that were strongly hit by the virus (United Kingdom, Croatia) or those whose markets are slowing down (Hungary). In contrast, representatives from countries with strong foundations for further real estate market development consider their prospects to be good. Specifically, this includes Belgium, where prices have been steadily rising for the past 37 years, the Netherlands, Norway, Israel, Slovakia, and the Czech Republic. In any case, their forecasts are based on currently available information about the epidemiological and economic situation and could change if unexpected events occur.

Reasons for Investment

In the second quarter of 2020, significantly fewer transactions are expected than in previous years in most selected markets. The decline will occur due to uncertainties related to the economic and epidemiological situation, which could prompt potential buyers to postpone their decisions for safer times. Moreover, most banks in the countries participating in the survey have already begun to apply stricter conditions such as lower loan-to-value ratios (LTV) or higher disposable income for applicants for new mortgage loans. On the other hand, interest rates of almost all central banks are approximately zero, meaning that interest rates on residential loans will remain low in the coming period. This could encourage individuals with stable incomes to invest in real estate.

When it comes to prices, most countries expect stagnation in real estate prices or slight changes before they begin to rise again in 2021 or 2022. Most countries with positive prospects, such as Luxembourg, Belgium, or the Netherlands, have limited available land, making them attractive to foreign highly qualified employees. In contrast, a significant decline is expected in the United Kingdom once the market becomes fully aware of the economic effects of the pandemic and the still uncertain outlook of Brexit. Hungary also expects an accelerated decline in an already slowing real estate market.

Other countries that will be negatively affected by protective measures and people’s caution will be traditional summer destinations such as Croatia, Spain, or Italy, whose economies heavily depend on tourism. Prices of weekend homes in these countries could particularly fall due to weakening demand. Interesting circumstances can be observed in the real estate market in Bosnia and Herzegovina. The further development of this market is strongly intertwined with the economic development of Western Europe, as a large portion of buyers belongs to the BiH diaspora, people who live and work abroad. A similar phenomenon, albeit to a lesser extent, will also be present in other real estate markets in Eastern Europe.

Return to Nature

The current unexpected situation has brought several restrictions to the functioning of the real estate market. In the near future, many technological solutions will emerge that will change the now complicated market processes. In many countries, properties were viewed virtually, via video calls, to comply with physical distancing measures. The pandemic may change the way people think about housing. Enabling remote work may redirect some demand from cities to suburban areas and balance prices across countries. Furthermore, electronic contract confirmation using blockchain technology may become part of the standard sales process, just like virtual tours of projects currently under construction.

The crisis has provided the entire market with a new perspective on how people across Europe live and has opened the door to changes.

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