Campus WU

Will real estate prices go down due to the COVID-19 crisis?

07/04/2021

Gunther Maier, Research Institute for Spatial and Real Estate Economics

Dardan D.: Will real estate prices go down due to the COVID-19 crisis?

The question of whether real estate prices will go down due to the COVID-19 crisis has several answers. The short-term answer, at least for Austria, is this: “Not at the moment.” In the medium term, however, we should expect to see decreases in property prices if the crisis lasts much longer. But let’s take a closer look.

Different kinds of real estate prices

Even during normal times, there isn’t one single real estate price level. Instead, there are many different types of real estate prices that don’t necessarily develop in the same way. Some of them may go up, while others may go down. Real estate markets are defined by location and different property categories. The situation in Vienna is different from the situation in the suburbs, and it’s also different from the situation in other cities such as Salzburg, Innsbruck, etc. The mechanisms that determine residential property prices are different from those that apply to offices, shops, shopping centers, hotel properties, etc. But all of these markets are linked to each other to varying degrees. However, their development can differ significantly even in normal times.
The real estate market is governed by the laws of supply and demand. If a certain type of property is in high demand in a specific area where few of these properties are available, prices will go up. If the scenario is reversed, prices will go down. So far, property prices in Austria have not decreased in the course of the COVID-19 crisis. This raises the question of why demand has not weakened during the crisis.

The real estate gold rush

The COVID-19 crisis creates insecurity. No one really knows what the situation will look like a week or two weeks from now. Wealthy people therefore need to find safe havens for investing their money. Compared to other assets, investing in real estate property is considered to be relatively safe. Even if the economy collapsed completely, the investors would still have their properties. For this reason, many investors turned to real estate as a safe haven when the COVID-19 crisis started. This effect overcompensated a crisis-related slowdown in demand among other people, resulting in continued increases in property prices.

The long-term perspective

This effect can’t go on for too long, however. If the crisis persists and no upswing is in sight anytime soon, companies and shops will have to close and more and more office and shop spaces will become vacant. And vacancies cause prices to go down. Due to the effects of unemployment and short-time work, private households will also become wary of buying or renting new houses and apartments. The longer the crisis persists, the more demand for real estate property will weaken and the lower prices will fall. And the investors who joined the real estate gold rush won’t be satisfied with simply owning their properties, they’ll also want to rent them out. This will only become more difficult the longer the crisis lasts, however, causing demand to dry up gradually.

Answer by Gunther Maier, Research Institute for Spatial and Real Estate Economics

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