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Despite the COVID-19 pandemic, housing prices are increasing

Deividas Urbanovičius
Despite the COVID-19 pandemic, housing prices are increasing
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After the serious implications of the 2008-2009 World’s Financial crisis, many people considered investments in housing as high risk and likely to be impacted again in another Economic turmoil. Surprisingly, during the worldwide pandemic of COVID-19, the data, provided by the Economist in their recent article suggests the opposite. The real estate prices in most middle and high-income countries have picked up and risen at an annual rate of 5% during the second quarter (graph below).

There are a few reasons for that. First, it has been suggested by studies that real estate prices increase have a strong link with the falling interest rates. During the pandemic, the interest rate in the US and certain EU states has fallen. Secondly, due to the reason, that the other asset classes had their returns decreased, the landlords are willing to pay a price premium on the property. Lastly, as we have seen in Ireland prior to COVID-19 the shortage of housing, draws the prices up and creates a perfect environment for new real estate developments. The experience of the last recession and especially in Ireland, suggests that even when the economy recovers, construction lags behind. It may take more than a pandemic to shake the world’s largest asset class.

Other measures directly support the housing market. In Lithuania, Latvia, Spain, and other countries the borrowers were allowed to suspend their debt repayments. An interesting piece of data is that across the World, countries are recording the lowest foreclosure rates in decades. 

Despite the pandemic, last year was active in the Lithuanian real estate market. According to the data by the Registry Center, the total number of registered transactions was only 0.6% lower than in 2019. In the spring of last year, we saw a significant drop in demand and supply of real estate, but as the year progressed, the mood has changed and became more optimistic, which allowed demand to reach a pre-pandemic level. The supply did not catch up so quickly to the growing expectations of the population, which contributes to the fact that Vilnius currently has a smaller supply of new apartments. This leads to an increase in real estate prices in Vilnius, which is also affected by rising construction costs and the lack of suitable areas for development.