One of the largest real estate portals in the U.S. recently released an in-depth study assessing the impact of recent emergencies on the real estate market. It was about the 2003 SARS epidemic in Hong Kong and the first data now coming out of China.
The study is of particular interest because it helps provide what different future scenarios might be:
- During the 2003 SARS epidemic in Hong Kong, the economy came to an abrupt halt, with a 5-10% drop in GDP. However, the rebound and subsequent growth was just as rapid when the epidemic ended.
- This pattern differs from the standard recession, in which the economy falls for 6-18 months and then slowly recovers.
- During the epidemic, housing prices in Hong Kong remained stable.
- Instead, deals virtually came to a halt for a while: their number dropped by 72%.
- Potential buyers simply stopped visiting housing. They avoided contact with people because of “avoidance tactics” (avoiding trips, restaurants and group meetings), that is, they took obligatory measures of social distancing.
- When the epidemic ended, transaction volumes returned to their previous levels.
- During the current emergency in China, the first news also shows that the number of transactions (up to 98%), rather than housing prices, has fallen.
That is, based on data from the recent past and from today’s China, we can expect a temporary freeze in the real estate market for the duration of the emergency without much impact on prices.
As for today, it is difficult to accurately predict the development and consequences of the economic downturn associated with the epidemic. It depends on how the disease spreads and on the countermeasures introduced.
In addition to analyzing the impact of SARS on the economy, there is an extensive literature on the likely economic impact of influenza epidemics. The Congressional Budget Office (CBO) has summarized a significant portion of such publications, providing preliminary data on GDP reductions under various scenarios:
- In a severe flu epidemic (at the level of the “Spanish Flu” of 1918), the estimated drop is about 4.25 percent of current GDP.
- In a moderate epidemic (similar to the 1957 “Asian flu” and the 1968 flu pandemic), it would be about 1%.
- In both cases, the CBO anticipates that economic activity will recover quickly at the end of the epidemics, which is consistent with the Hong Kong epidemic.
Let’s take a look at what happened to home prices and transaction volumes in the U.S. during the recent “standard” economic downturns.
Strange as it may sound, a recession does not necessarily imply a negative real estate market. In fact, it tends to have the opposite effect, as can be seen in the chart below, which takes into account home prices during the last five recessions in the U.S. economy since 1980.
- Only twice, in 1990 and 2008, have home prices fallen.
- In 1990, it was less than 1 percent.
- In 2008, the economic crisis itself was due to the collapse of the real estate market.
- During the other three recessions, home prices rose.