What can real estate expect in 2021?
After rain there is sunshine, as a Dutch saying goes. And if you have as much rain as we do, you know what you are talking about. So, can we expect sunshine to return in 2021, after this very ‘rainy’ 2020?
Fortunately, sunrays broke through in the US. The economy turned out to be the most important factor (38%) for voters, not covid (18%), which almost cost Joe his election. The statistical pollster models were wrong again, suffering from cognitive bias, while as more data are published, mortality comes in below projections and economic damage beats expectations. Furthermore, vaccine tests look promising. Optically there is a trend emerging and we can have hope for 2021.
Before we can answer how this will affect real estate markets, we should delve into the past to understand the current situation. Post-WWII we had the welfare state-led rebuilding era ending with 1970s stagflation, then the markets-driven globalisation era terminated by the global financial crisis. Today our new era is experiencing its first major downturn.
The early 1980s real estate crisis was severe, the ‘patient’ critically ill. The rebuilding era was based on real wage growth, welfare safety nets and interventionist government policies. All this overheated in the dark 1970s and caused stagflation, i.e. high inflation with no economic growth. This is probably the most adversary environment for real estate (imagine 15% interest rates, 10% inflation and 7% prime yields). This was an external disease, and it wasn’t until Dr Reagan and Dr Thatcher performed the critical surgery that our patient was able to recover to full health.
The liberalisation of capital markets was positive for real estate, and the changing attitudes to risk linking it with return created a development boom to support the growing economy financed by a deregulated banking system. The 1990s real estate crisis was hence a typical pig cycle one: excessive development of capital-intensive product based on too optimistic forecasts funded with debt.