The real estate market plays a major role in the economy. The long period of low interest rates has pushed up property prices and also enabled brisk new construction. However, the real estate market is now in a state of flux, with several factors simultaneously affecting the real estate and housing markets. The most important factor is the recent rise in interest rates and their possible evolution during this year.
Remote working and offices
The increase in remote working has weakened the demand for office space. At the same time, cities are having to reinvent what the function of the city centre is. How to get people spend time in the city centre and what services are needed? If the need for offices decreases and work is also done remotely, there will be a demand for a more welcoming city centre. If they are not turned into “museums”, perhaps they could be experiential places for city dwellers and tourists.
Investors have long been interested in logistics properties. Technological transformation and online commerce have created a growing need for logistics properties. Shops showcase goods and the Internet is the place to buy. This good development will probably continue.
Housing values
Housing values have risen significantly, and this trend has differentiated thriving urban areas from declining ones. Low interest rates, remote work and the use of debt have boosted the construction of housing. Now the general rise in interest rates has stopped this. The number of unsold apartments has increased, and home buyers should wait a while for either lower interest rates or lower housing prices. In the long term, however, housing has been the number one investment for many. Population growth drives the value of houses. Urbanisation has continued and is expected to continue.
Continuing threat from China
Population growth is also a key variable in the real estate and housing markets at a broader global level. The Chinese real estate market, and property developers in particular, have long been plagued by problems. The real estate and housing markets are an important component of China’s economic growth. Several housing builders have run into problems in China, but the immediate threat was resolved in last autumn when state-owned companies came to the rescue. Now this concern has reared its head again, as the frenzy of easing Covid restrictions has subsided and economic growth is fading. The government and the central bank have now stepped in to stimulate and sustain demand.
Banks in the USA
US regional banks are important real estate financiers. In the spring, there were concerns about how the balance sheets of these banks would withstand potential problems with real estate lending. No real problems have surfaced so far, but if interest rates remain at current levels, this concern will intensify. Regional differences are large in the United States. The housing market on the West Coast has been the most expensive and has also been the hardest hit by the fall in prices. The fate of office premises is an issue of concern and a key factor in assessing the impact on banks. Interest rates should come down at least a little to avoid problems and challenges turning into a crisis.
Sweden is a different country
The Swedish housing market has been hot for some time, but now the good performance as been replaced by a sharp fall in prices. Home prices have fallen by more than 15 per cent and many people are worried about the future. At the same time, the Swedish krona has fallen significantly against the euro, by up to 25 percent from its highest levels in ten years.
Nordic banks use their own models for calculating solvency. Home loans are classified as moderately low risk. If housing prices continue to fall, this will be reflected in the solvency of Nordic banks.
To sum up
Real estate and housing markets play a key role in assessing economic growth. These markets, like many others, are self-sustaining. If the outlook is good, there are good prospects for further investment. This is not the case now. If interest rates remain at current levels under the impact of high inflation, or even rise, this will create problems for the real estate market at large. Lower inflation would therefore be key to removing upward pressure on interest rates and avoiding problems in the real estate market. In the long term, however, real estate provides a hedge against inflation.
The writer is VER's CEO Timo Löyttyniemi.
