Monday, April 12

Introduction and Moderator
Mr. Reiner Martin, Lead Economist, Joint Vienna Institute

Panelists
Mr. Marco LoDuca, Advisor, European Central Bank
Mr. Jacek Aleksander Laszek, Economic Advisor and Team Leader, Narodowy Bank Polski
Mr. Krzysztof Olszewski, Economic Advisor, Narodowy Bank Polski
Mr. Ivan Huljak, Chief Advisor, Hrvatska Narodni Banka

Residential real estate (RRE) markets are impacted by the COVID-19 pandemic in several ways. On the one hand, lockdowns and the increased use of remote working practices are likely to increase the demand for RRE and accommodative monetary policy is likely to improve its affordability. On the other hand, the economic downturn and increases in unemployment are expected to weigh negatively on demand. Which of these effects prevails, is difficult to assess and likely to differ from country to country.

Against this backdrop, the webinar reviewed and discussed RRE developments in the euro area, Poland and Croatia one year after the start of the pandemic.

Marco Lo Duca (ECB) looked at the impact of COVID-19 on RRE markets in the euro area. Euro area RRE markets remained resilient so far despite the negative economic impact of the pandemic. The rising disconnect between RRE prices and the economic environment implies, however, rising overvaluation and growing risks of price corrections. Resilience can be explained by several factors. First, favorable financing conditions. Second, support measures such as loan moratoria and job protection schemes, shielding households from the impact of the pandemic. Third, increased savings and the continued perception of housing as a safe investment. In addition, a drop in construction activity weighs negatively on housing supply. Downside risks to RRE include the challenging macroeconomic environment, the continued build-up of RRE overvaluation and household indebtedness, and the expiration of support schemes, in particular, if they are terminated prematurely.

Jacek Łaszek, Krzysztof Olszewski, Joanna Waszczuk (all NBP and SGH - Warsaw School of Economics), and Hanna Augustyniak (NBP) investigated why the Polish RRE market was not hit that much although the COVID pandemic generated a larger shock to the real economy than the 2007-2009 global financial crisis. They argued that the current situation is different in three main aspects. First, the government and the central bank reacted very fast to the pandemic, which helped to cushion the negative effect on the real economy. Second, the developer housing market is more mature. Developers are well-capitalized and experienced, allowing them to use monopolistic competition strategies to restrict supply and keep prices high. Third, looking at the situation in Warsaw, buyers on the primary market finance flats with a significant share of equity. Since 2016 private investors started to purchase RRE for rental purposes, generating an alternative for owner-occupied housing. The authors approximate RRE investment demand with a simple model of the primary market, showing that fundamental housing demand remained stable, but investment demand decreased. They stress, however, that the pandemic is still not over and the results should therefore be taken with caution.

Looking at RRE market developments and financial stability in Croatia, Ivan Huljak (HNB) showed that RRE prices continued to increase in 2020, although the macro-environment deteriorated significantly. Based on HNB calculations, RRE became overvalued in early 2019, exceeding previous all-time high price levels, although this is based on relatively fewer transactions. He argued that RRE in Croatia is benefiting from „environmental” drivers such as the coronavirus, earthquakes, the low-interest environment and the lack of alternative investments. Since current RRE price growth is not fuelled by excessive lending, some macroprudential actions might be of limited impact. Mr. Huljak stressed that the real exposure of the financial sector to RRE is higher than what balance sheet data suggest, given that banks finance also the supply of RRE. He closed by wondering about the prospects of a swift reversal of recent developments and stressed the importance of shifting the focus on individual borrowers.

Reiner Martin, Lead Economist, JVI