Against all expectations, the world’s single largest asset class has continued the strength that it saw before the pandemic. Economists, homeowners, and investors braced for the worst in terms of the pandemic’s impact on real estate, but things have turned out rather differently. Their apprehensions were justified. Although data is thin, investors say that during the last major economic downturn in Sri Lanka in 2001, when annual GDP contracted 1.5%, homes and property values took a beating. No one living in Sri Lanka, until 2001, had experienced a property market downturn like the one triggered by a weak economy that year. Developers, real estate agents, and investors say that so far, house prices are holding up.

However, the economic impacts of the pandemic aren’t tapering away. They may last for a year or more. We answer some of the questions that investors may have about the future performance of real estate as an asset class.

As interest rates have fallen, real returns have narrowed. Will this impact house prices?

Lower real interest rates have a correlation with house prices rising. However, although interest rates have fallen and people can take up mortgages that they couldn’t a year ago, banks and mort gage companies everywhere are a lot more nervous about lending to risky customers. So people who have lower-incomes or firsttime buyers will find that obtaining a mortgage now is more difficult. Banks are now offering floating rate mortgages for as low as 9% and fixed-rate ones at 9.5% (fixed for three years). At the same time, however, banks have pulled back from the bottom end of the market. Also, someone who is self-employed will find it much harder to obtain a mortgage now than a year ago.

How crucial is the impact of monetary policy on the property market, particularly post-pandemic?

First, you have to distinguish between prices falling, and the rate or price increase declining. We will see more of the latter than the prices actually falling. And then, there are things like monetary policy that can explain what’s going on in the housing market. Banks are flush with cash and prefer to lend to mortgages where the capital requirement for a loan is lower, and because it’s asset-backed, a safer bet overall. But the question is if the ordinary salaryman is ready to buy a first home or seek a bigger house in this economic climate.

What about the idea that people will move to more remote places because they can work online? Will people move to the South coast or the countryside?

There are a few things to that. One is that if it’s merely demand being shifted from cities to suburbs, then theoretically that should not have an impact on the prices. As to the question of that happening, not in Sri Lanka so far. In general, house prices in the suburbs increase pretty much as quickly as those in urban areas. At the moment, cities hold a lot of attraction to people even though they are quite dense and full of coronavirus.

What about the outlook? If you think that interest rates are likely to stay low for some time and the government continues to be as fiscally generous as they have been, could all this come to a grinding halt when the government starts removing all this money they are pouring into the economy?

You can’t just think about what’s happening to demand, you also must think about what’s happening to supply. On that front, there has been a sharp fall in construction in the last six months so people are competing for a smaller supply of houses which will push up prices. Further, supplies that have to be imported for construction, like the elements for the service in high rise apartment buildings etc, are delayed. So why aren’t prices rising faster? Well, probably because demand has also declined along with the supply. One of the lessons from the 2001 housing downturn is that demand can come roaring back when employment rises and wages start going up, but it will take much longer for the housing supply to bounce back. A number of economists say something similar could happen this time, of extra demand running up against low supply and that could mean house prices would hold value. Is falling supply also due to building sites closing down because of social distancing requirements, or is it because investment is falling? It’s both. Maintaining social distancing on a building site is difficult, so that raises the cost of construction. The other thing is economic uncertainty is, unsurprisingly, high at the moment, and there is good evidence that uncertainty generally dissuades investment. The same is true for housing.