How real estate prices will respond to covid-19 crisis

Over time, Economics has dictated that during times of crisis, general prices of goods and services will respond either with an increase or a decrease in the price of any item. However, there exists a trend that prices of real estate especially land and houses do not respond the same way. The stress that the global shutdown inflicts on the property industry will reveal a lot about how resilient property prices are to this kind of event. It is true that property prices are very resilient in such times.

Prices for land or housing will not experience a rapid fall, their resilience will cause them to stay the same for a while or reduce slightly (about 10 per cent) as they wait to respond to other stimuli such as infrastructure and recovery in other business sectors. The real estate market is not as quick to react to situations as the stock market or other products.
In detail, how explicitly does a crisis like Covid-19 cause real estate prices to go higher or lower?

The 2007-2008 housing crisis and economic crisis in the USA that later spread to other countries globally is considered by many economists to have been the most serious financial crisis since the great depression of the 1930s. Many citizens may hope for something similar to happen, but such a crisis is impossible in the current times. The causes of the 2007 crisis were unmatched and are nothing close to what is happening now. What we are most likely to face now is nothing related or close to what happened in 2007.

As a fact, so far, it seems conclusive that the real estate market will witness a negative growth majorly evidenced by a reduction in sales volume but not a reduction in prices. The global economic slowdown coupled with the coronavirus pandemic is going to be a major cause. It would be true to say that even when prices go down a little, sales might not increase because people do not have money. The negative growth stems from the fact that prices will either stay the way they are or reduce slightly, which will all not evidence any increase in transactions.

Commercial retail space
It is estimated that more than 4,200 companies are due to close because of the pandemic that has caused a situation called financial distress and business failure. It is also right to assume that all these companies have been housed in commercial buildings around the country. This indicates that they are going to terminate their tenancies which will create a lot of vacant space in the commercial retail sector.

The truth is that tenants are generally distressed. Rates of commercial rental real estate are definitely going to go down because tenants cannot pay, they are closing businesses and also moving out. Too much supply of rental space, high vacancies and low demand will push the prices down to as low as $12 (about Shs45,000) per square metre up from an average $17 (about Shs64,000) in 2019 into 2020. But this will be for a select official buildings in town. Malls such as Acacia, Oasis, Village Mall, Lugogo Mall, will respond differently. This is because their category of clients such as banks, big super markets, big restaurants, and telecommunication companies, will not exit and they will still have capacity to pay.

Farm land
Prices of farm land are most likely going to gradually go higher. The major reason is because in the next season, due to an increase in demand for food and also due to the fact that many have realised that this is one of the many sectors that cannot be affected by a lockdown, many will want to buy land and venture into farming. The increased demand for such land will push prices up for a significant period.
We also need to note that because of distress and rising levels of poverty, remote owners of land in villages might sell at cheaper prices but the increased demand for such remote land will again push prices higher.

Houses and residential land
When prices of real estate in an era such as the one post Covid tend to fall, what is expected is a fall of at most 20 per cent or less, but the normal is most likely to be 10 per cent. This means that a plot of land, which was initially selling for about Shs25m before Covid may reduce up to Shs22.5m. But we should note that sellers of property give commission to brokers, this intonates between 5 per cent to 10 per cent of the purchase price.
In such a situation, the seller would have to still part with almost another Shs2.5m to cater for brokerage fees and other expenses during the sell. This means that a further reduction in the initial property price is not justifiable, which means they are most likely going to maintain the price or reduce less.

However, it is also expected that in light of a crash in prices, developers are most likely to hold on to their properties and not list them for sale in anticipation of any future price increases. This is because the reduced prices will impact the profits of the developers and subsequently, their inability to service loans they used to develop the properties and also get a good return on Investment. What we are witnessing now is that owners aren’t panicking and throwing their property on the market, which means that the market is still going to stay normal. Commercial sellers are always looking for a good price for their property, not selling because of need.
Real estate agents indicate that whereas buyers are scarce during Covid-19, they expect such a situation to continue for a period of about three months post Covid. They however, still indicate that general prices of property have remained the same and are most likely not to fluctuate down.

Right now, buyers are not buying and builders are either building less or nothing at all. The pandemic and virus-fighting measures have disrupted momentum as both buyers and sellers adopt a more cautious posture. Searches for land and homes for sale have fallen across the country because everyone has chosen to first stay where they are.
As an advantage, in the long run, the crisis is going to positively impact the real estate sector. This is because thousands of families have witnessed the advantage and beauty of having a personal spacious home if any sort of crisis ever ensues. Being able to ride a bicycle with your children in a sizable compound is desirable, running around with your children to play soccer or to exercise is thrilling. Those that have not been able to do it will want to buy a plot of land that will help them reap that benefit in the foreseeable future.

This lockdown has created the mind and desire for a village home, spacious with a small garden at the backyard and some space to relax and fight the boredom. A question therefore rises, will COVID-19 be the impetus for people to escape urban environments and seek the safety and solitude of growing residential zones such as Mukono, Matugga, Kiwenda, Busika, Katende, Bujjuko, and Kakiri? Those answers remain to be fully seen.
For potential home buyers, who have job security or cash flows, it will be an excellent buying opportunity.

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