The COVID-19 crisis came to shake all markets and real estate was no exception. The interesting note on this particular market is that in most cities, the decreasing production of new homes and available real estate inventory – as a direct consequence of the various imposed lock-downs around the world – made the prices to keep increasing, despite the economy clearly signaling we have a severe crisis to come.
That is not true everywhere though. Whereas this phenomena is very prominent in medium and small sized cities, the big metropolis of the world are struggling to keep their numbers up.
The new “working from home” dynamics allowed most people to detach from their physical office, setting them free from paying big money for small apartments in the big cities, just to stay close to work. This summed up with the fact that cities like New York, London and São Paulo, were among the most affected by the COVID-19 crisis, with stunning death tolls and number of cases.
Put all this together and you end up with a lot of people leaving the big cities and moving to smaller areas, where they can still work, have a healthier environment and significantly increase their living standards with real estate prices that, sometimes, can be half of the ones in the cities they are coming from.
The problem?
Imagine you live in New York, and have decided to move. In New York, the average real estate price is of about USD 760,000, so let’s say you sold your 2 bedroom house for that and are looking to buy a new home in Dallas, where the average real estate price is of about USD 365,000. On an overly competitive market, where there’s simply not enough inventory to cope with the demand, you probably wouldn’t bother to pay USD 400,000 for the same 2 bedroom house to ensure your offer will be accepted by the seller, and in this hypothetical scenario, you would still cash-in USD 360,000.
It works all well for you, who has increased purchasing power due to selling on a more expensive market and buying into a cheaper one, though, by doing that, you are not only directly pushing prices up, but also outbidding locals, which puts even more pressure on the market and helps on worsening the housing affordability issue.
The ultimate consequence from this social dynamic changing is currently unknown, but on the short term we can definitely expect housing prices to keep climbing in smaller cities, and unless the industry manages to pick up the pace again on building new houses, we will see an increasingly competitive market, where it will become harder and harder for the average worker to afford to own a home.
The opportunity?
We see real estate prices on big cities coming down at some point. That is mostly due to the natural offer and demand dynamics, where inventories will keep increasing, as more and more people will leave.
As it might cause a short-term drop on pricing, we don’t see it as a long-term settling dynamic. We expect people wanting to get back to the big cities once we are over COVID-19, and that should put prices back into the upward direction.
So buying under-valuated assets in these places might pay high dividends in the long-term horizon, and when we talk about real estate, the historical data supports the claim that as population grows, prices tend to go up on the long-term, regardless of eventual set-backs and crisis.
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