Q3 High Impact Idea: Property

Property: Boom or Bust?

Property prices are on rocketing. What is fueling this rise and will it fizzle out anytime soon?

1. Cheap money

The pandemic-induced recession has driven central banks globally to reduce interest rates, pushing mortgage rates to record lows. At lower rates, it is cheaper to borrow, fuelling the rise in demand for residential properties.

What has happened?

Freddie Mac, federally backed mortgage investor which aggregates rates from around 80 lenders across the U.S. reported its 30-Year Fixed Rate Mortgage at 2.98% for the month of June 2021, near its historic lows of 2.68%. [1]

What is likely to happen?

Cheap mortgages are likely to continue into its run until the Fed announces the rising of its interest rates and tapering of its bond-buying program. The Fed has brought forward its expected timeframe of when it will next raise rates, hinting at a rise in 2023. However, they have given no indication on when they will began cutting back on its aggressive bond-buying program. Till then, we expect mortgage rates to remain low and demand for housing to continue.

2. Supply Shortages

While demand has risen as a result of lower mortgages, supply of properties experienced a shortfall from the slower trade of supplies and workers, resulting in delays in new housing constructions and pushing property prices up further.

What has happened?

The World Trade Organisation estimated that the volume of world merchandise trade fell as much as 5.4% in 2020 as a result of the pandemic-induced collapse which bottomed out in the second quarter of 2020. Countries which relied heavily on foreign supplies and workers for housing have seen construction delays, and a subsequent surge in property prices as a result of the fall in supply.

What is likely to happen?

While the WTO expects the volume of world merchandise trade to increase by 8% in 2021, they forecast that trade growth will then slow to 4% in 2022 with the effects of the pandemic still leaving trade to below its pre-pandemic trend.[2] Building constructions may continue to face a shortfall in supplies and workers, keeping property prices up.

3. Economic recovery on the horizon

As global vaccination rates tick upwards by the day, governments worldwide have begun easing restrictions, allowing shopping malls and offices to return to some form of pre-pandemic normalcy. This may spell good news for REIT investors.

What has happened?

As of 25 August 2021, more than 5.02 billion vaccine doses have been administered worldwide, enough to fully vaccinate 32.7% of the global population.[3] While the pandemic left workers and consumers confined to their homes last year, with rising vaccination rates, leaders worldwide are increasingly confident of opening their economies safely.

What is likely to happen?

According to the OECD, Global economic growth is now expected to be 5.8% this year, a sharp upwards revision from the December 2020 Economic Outlook projection of 4.2% for 2021.[4] We can expect further reopening of economies, with more consumers and workers returning shopping malls and workplaces, barring the threat of new virus variants that have the potential to hinder vaccine effectiveness.

Property Funds

Amongst a plethora of property investment vehicles available in the market, funds offer a simple and fuss-free way to gain exposure to the property sector. In particular, the Janus Henderson Global Property Equity and Manulife Asia Pacific REIT funds present an opportunity for investors seeking both income and capital growth from properties.