Home is Where the Mortgage is: 2008 Crisis has Lessons for Sector

HousingOf all the sectors affected by the pandemic, the housing market has performed better than expected.

In 2008, home loans were at the epicentre of one of the largest economic downfalls in history. The packaged selling of risky loans led to mass defaults, sparking a crisis whose effects were felt for more than a decade. Unemployment rose, incomes fell, and the global economy entered a period of uncertainty.

That sort of thing makes banks jumpy; they are less likely to lend during periods of high unemployment. Lost jobs in 2008 meant loan defaults, panic selling, and a glut of houses on the market. And the crisis wasn’t limited to the US. According to the Office for National Statistics, the average UK house price fell by 15 percent between January 2008 and May 2009.

The uncertainty surrounding the Covid-19 pandemic could lead to a similar situation. Some 9.6 million jobs have been lost in the US in 2019 and 2020, and the factors that prompted people to sell property in 2008 are again in play.

But despite all the signs, the housing sector has moved in an unexpected direction. The average US house price rose by 9.6 percent from December 2019 to December 2021. Changes to fiscal policy changes and consumer behaviour are propping up the industry, and allowing it to grow.

In the UK, landlord and tenant protectionist policies were enacted. In March 2020, the UK government implemented the Coronavirus Act with an increased allowance for housing benefit and universal credit, permitting local housing allowance to cover 30 percent of market rents. Landlords had more time to give notice of their intentions, allowing tenants a chance to financially recover.

In the US the focus was different. The government first provided relief through the federal CARES Act and stimulus cheques. They also allocated more funds to state and local governments for rent-relief programmes, and the CDC (Centre for Disease Control) enacted a temporary pause on evictions.

These policies ensured the industry did not suffer to the extent it did in 2008. Although there were significant job losses, household income in G7 countries was up $100bn in the second quarter of 2020 compared with the same period in 2019. Borrowers in Spain could suspend mortgage payments, and in Japan regulators asked banks to defer principal repayments on mortgages. Economies across the world were galvanised to prevent a crash.

But — as with all policies — there are likely to be some unintended consequences. The OECD released a report detailing some potential long terms effects these policies could have on the housing market. It tested for rent payment deferrals and eviction suspensions. In the long term, a loss in labour mobility was seen as likely. The new incentives cause a lack of willingness to relocate, making the allocation of resources difficult. Less mobility means less demand for new homes — affecting the construction industry.

Construction has slowed because of Covid-19 regulations —by 40 percent and 30 percent in the US. With low demand, the OECD report called for correctional polices to be introduced. It points to easing land restrictions and expanding public spending on affordable, sustainable, and environmentally secure housing. This would allow construction to match growing demand for environmentally friendly housing.

The manner in which governments resolve these issues could point the housing market in a new, and potentially better, direction.

By Yogesh Patel

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