The coronavirus pandemic is an unprecedented catastrophe whose effects on our economic and social lives are yet to be quantified. What is apparent though is that the real estate sector just like any other business globally, has been hit.
However, Shirley Kongai, the president of the association of real estate agents in Uganda, notes that housing as an asset class, has been hit in varying degrees and some sectors have been hit harder than others.
“What work from home has proven is that it can be done, but it is too early to prove that the office will completely cease to be an integral part of work. Yes, some offices might close and others might get smaller in order to accommodate shift work in observance of social distancing, but the office will still remain,” Kongais says.
Similarly, retail shops too have a binary option of taking their goods online while maintaining a physical store. This, Kongai believes might prevail for now as companies are watching their bottom lines but things might change later when the economy picks up.
“What must be understood is that housing is an abiding human need just like food, water and clothing. So for now it is true that the declining consumer spending has hit the retail sector so hard and the landlords have been hit harder because they are losing revenue since tenants are unable to pay with their shops closed. However, once the economy begins to recover, they will be able to collect again,” she reveals.
Ordinarily, there are a number of things that affect house prices such as population, unemployment, economic growth (inflation), interest rates, and availability of mortgage.
“This means that if the economy is doing well and people are gainfully employed, they will be able to buy houses. Also, if the banks’ interest rates are lower, then more people will be able to borrow and buy houses, all these factors tend to mean prices will be higher,” says Kongai. Prices may also become higher if the population has increased thereby causing a spike in demand; growing demand usually means higher house prices.
Then there is a matter of speculation. Basing on the current market trends, people just assume the prices will continue to rise so they decide to buy now. This is called a housing market bubble.
Bubbles are always followed by housing market crashes when house prices fall sharply.
All these are well known and proven factors that affect housing prices, which makes the possible effects of this pandemic difficult to say as there are no benchmarks to base on.
“Just before the lockdown, the housing market in Uganda was doing fairly well. Not robust, but it was getting back on its feet, there were many inquiries and even some transactions which came to stand still. I do not think prices will suddenly go down just because there are few buyers. No seller or property owner in their right mind will sell their house at below its market value; I think they will be able to hold onto their properties until the economy recovers. This means the prices will remain stable,” Kongai explains.
What remains constant though according to Cissy Namaganda, a property manager, is that the number of househoulds has been rising and the number of single people living alone is increasing, which have increased demand for houses leading to a deficit in supply.
“Demand affects prices of houses more than supply in the short run as it takes a long time to build new houses. For now, the supply of housing is fixed. So it is safe to say after the recovery from the pandemic, we might see housing prices rising if people get new jobs and businesses start making money again,” Namaganda says.
The government is yet to pronounce itself on a stimulus package and other interventions planned for the real estate sector.
“But I read that the International Monetary Fund (IMF) has extended a $491m [about Shs1.8 trillion] relief assistance to Uganda hopefully it goes to helping SME’s and consequently the housing sector,” she hopes.
The construction sector was not hit as badly as the other sectors since they were allowed to continue work during the lock down. Construction engineer Ronald Atwiine says construction funding is usually pre-approved and allocated which should have protected them from the effects of the lockdown.
“Some of the construction sites that were already in progress continued operating during the lockdown and will be complete according to the deadline. Others, however, especially the small ones that could not afford to accommodate the new logistics needed, were temporarily halted. These will have a minimal effect on the housing market in the long run,” Atwiine says.
He further notes that Covid-19 will have minimal impact on prices, especially on residential property as people will still demand for shelter. “There is still the housing deficit that continues to grow. There may be a slow down on rent collection in the short run and landlords may give concessions, we might see some evictions but in the long run I think the impact will be minimal,” he reveals.
Shem Bageine, the MD Bageine and company, a real estate firm, says it is important to note that the Covid-19 virus is unprecedented and as such it is extremely difficult to pinpoint exactly what the effect of the pandemic and the mitigative measures adopted across the globe will be. That notwithstanding, the expected impact of this on residential house prices would be as follows.
The impact on the wider economy is expected to be a slowdown across all sectors but more severe in some than others (mainly those that relied on large numbers of people - those most likely to be adversely affected by social distancing). This is expected to reduce incomes of the majority of economic actors both in terms of companies/businesses as well as individuals and in the extreme could lead to closure of some businesses and the probable loss of employment for individuals.
Purchasing power of economic players is expected to reduce as a result and negatively affect consumption of goods and services across the board including the purchase of houses. The reduced demand is likely to cause downward pressure on pricing, which in turn could lead to a reduced investment in residential developments.
“However, the reduced investment in residential housing in the short to medium term would most likely keep the supply of housing at more or less a constant during the recovery period while the wider economy slowly begins to pick up and incomes gradually improve to, at least, the levels they were at pre-Covid-19,” he says.
As the measures to prevent the spread are slowly lifted, economic activities resume (hopefully in a more efficient manner as a result of lessons learned from the pandemic) purchasing power is expected to increase together with the desire of more people to own homes rather than rent them following the anxiety residential tenants experienced during the lockdown in regards to payment of rent and demands from landlords.
Bageine further notes that improved incomes arising out of better ways of working should lead to gradually increased demand for housing, which is hoped would in turn lead to eventual but lagged/delayed resuscitation of investment in its development. The expected outcome of this lagged/delayed response by investors could result in a momentary upward surge in housing prices.
Prices would then, however, be expected to even out eventually as the supply increasingly meets demand.
“The extent of this will depend on the length of the lockdown period and the ensuing recovery period together with measures taken to adjust the methods of doing business that are geared towards preventing the spread of the virus as well as designed to mitigate the impact of similar pandemics in future. The longer the lockdown, the more dragged out and more significant the impact will be,” he says.
Determinants of house prices
Over the long-run house prices depend positively on disposable income, wealth, and demographic needs, and negatively on user costs and the housing stock.
Househould disposable income plays a key role in shaping house price trends. The higher the real per-capita disposable income of households, the more they can spend to purchase a house or service a mortgage, pushing up house prices.