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Will the Corona Crash Impact the Housing Market?

Will the Corona crash impact the housing market? Short answer is yes, long answer is, it depends. It depends on location.

Location plays an important when it comes to real estate prices. Schools, biggest employers in the area, urban or rural.

Based on the UBS Global Real Estate Bubble Index 2019 there are a number of hot spots that scream real estate bubble. One of those is Munich which currently ranks as No. 1 on the UBS list.

I have seen people buying real estate at bubble prices in Munich, because as they put it:

Real estate prices will always go up and if you don’t buy now you are going to miss out.

or

There is nowhere else to put your money.

First of all, real estate prices don’t always go up. Have a look at Detroit or Florida after 2008. What about London?

Miami House Prices

Also, just because there is no other asset class that you can invest in, doesn’t mean you have to buy real estate. Ever heart of asset protection? Risk and return? If you are forced to invest, at least invest in assets where the down side is limited, assets that are much easier to liquidate, don’t carry high costs like real estate (taxes, repairs). Also for me, I don’t like to be leveraged.

Heck, I know people who bought a 800k EUR home a year ago after winning a bidding war against a bidder who was only offering 700k. A home that will take them over 30 years to pay off. Assuming they can have a steady income for the next 30 years. This is of course excluding taxes, repair costs, notary costs and the thousands of euros they spend on furnishing the place.

I know people who are forced to sell their stocks at bottom levels to pay of their mortgage. These same people bought a brand new Mercedes-Benz SUV last month (January, 2020). I am guessing also financed?

My all-time favorite quote I have heart a few months back about somebody suggesting the action that one should take when it comes to buying real estate in Munich:

If you see somebody with a shovel, then it is time to buy that place.

I am not in any position to say how people should handle their finances. And frankly, I don’t care. I am just describing a perspective here, in order to answer the question “Will the real estate market be affected by this?”. It may all end up well but it can also end up bad. I am putting my money on bad. At least for hot spots like Munich.

I am pretty sure that a lot of people are going to be out of a job in the next months or years. Not because their skills are not needed anymore or they are being replaced by a robot. No. It is because we have a pandemic and governments are shutting down everything. I mean in some countries, people are not allowed to go out anymore. In Munich for example a lot of jobs depend on manufacturing. Factories are shutting down because those are not jobs that you can do from home. Considering a lot of people over-leveraged themselves to jump on the real estate band wagon, without assessing the risks, a lot of them will not be able to pay their mortgage or re-finance themselves. When those people are forced to sell, prices will fall.

What about people that need to sell now, but there is nobody there to buy because the buyers are scared or not allowed to go out? Or buyers that are simply uncertain about their future and job? Prices will be dropping.

We have seen a number of companies switching to home office. When those companies realize that this is a huge cost cutting factor some of them will switch to remote positions or even automate a number of processes going forward after this crisis. The same for people who will be returning to the office after this crisis. These people will realize that it isn’t necessary to work on-side. Those people saw how flexible it is to work from home and will be seeking remote positions. But, if you are able to work remotely, then why would you stay in a city like Munich where half of your salary goes out for rent. A lot of people will be moving to more rural areas where rent prices are much lower and life quality is higher.

This is by no means an in-depth analysis. I simply see a few red flags that might cause the Munich real estate bubble to burst.

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