Rents know no Corona

Rents know no Corona
Numerous economists had predicted falling real estate and rental prices during the pandemic. But prices are on the rise.

by Peter Samol
[This article first published by Jungle.World on 8/31/2020 is translated from the German on the Internet, http://www.krisis.org.]

Weird thing: The pandemic is not depressing real estate prices

Once again, economists are surprised that reality doesn't want to follow their models. According to them, rents and prices in the real estate markets should be falling because people have other things to worry about in the Corona crisis than changing their residence or buying real estate. After all, the number of housing advertisements fell by almost 40 percent in April compared to the period immediately before the crisis.

According to the well-known standard model of economists, according to which prices are formed on the basis of supply and demand, this should actually have led to a noticeable drop in supply rents. So far, however, there has been no sign of any price collapse on the German real estate market. Although there was a slight drop in average prices in April, this remained within normal fluctuations. Compared with the previous year, asking rents for new leases actually rose by 3.6 percent in the second quarter of 2020. In the sale of condominiums and single-family homes, prices even rose by a good eight percent, and this despite the fact that economic output in Germany, as well as worldwide, has experienced the biggest decline since the start of the pandemic since it has been measured at all.

Pure market logic relentlessly drives up land prices in times of ultra-cheap money.

Why aren't housing prices falling? Economists are at a loss when faced with this question. Perhaps they should have looked up a certain Karl Marx. Indeed, the third volume of his magnum opus, Das Kapital, explains conclusively and plausibly why real estate prices do exactly what they are doing in a situation like the present one: namely, they are rising.

First of all, one has to realize that in the Corona crisis, it is solely the huge influx of money from the central banks that prevents an even greater recession. To keep their national economies running, countries around the world are taking on trillions in new debt. They pass the money on to companies, banks and, in some cases, private households, thereby preventing mass bankruptcies and rapidly rising unemployment. The money comes from their own central banks. By buying up government debt instruments, they create the corresponding money supply at the same time. This unrestrained money multiplication is the last resort to keep the global economy from crashing. No one knows how long this can continue.

According to the economists' textbooks, all this money should actually lead to inflation. But this does not happen, because it does not appear on the goods markets, but remains for the most part in the area of financial investments. The only prices that rise as a result are those for assets. Thus, the prices for stocks and other securities are being driven to unimaginable heights by the cheap money of the central banks.

But because these investment opportunities are no longer sufficient or hardly yield any returns, a considerable amount of money is moving into the real estate sector. Real estate is also an asset. But unlike stocks, bonds and the like, they are also essential consumer goods. Therefore, the flood of money from central banks leads to rising rents and real estate prices - quite independently of the actual demand for housing.

In this context, it is worthwhile to take a look at how real estate prices are actually determined. As one learns at the mentioned place with Marx, these come in remarkable way. Investors basically do nothing other than compare the income that a property brings in with the returns on the money markets. If, for example, a property brings in an annual rent of 20,000 euros, then this is simply equated with a financial investment that brings in the same amount in interest. If one had to invest, for example, 400 000 euros for the same profit, they assume that the above property has exactly this value, i.e. 400 000 euros.

It follows from this logic that property prices automatically rise when interest rates fall. So, in the example, if interest rates were to halve, one would have to invest 800,000 euros to achieve the 20,000 euros annual return. At the same time, the value of the property in question would also change in the direction of 800,000 euros. This means that when capital market yields fall, the price of land rises. With interest rates tending towards zero or even becoming negative, it is therefore only logical that real estate prices go through the roof.

Thus, pure market logic relentlessly drives up land prices in times of ultra-cheap money. Not even a pandemic can change that. Quite the opposite, in fact, because to combat the corona crisis, central banks are squeezing even more money into the financial markets than ever before. As a result, interest rates are historically low and are preparing to drive real estate prices to heights never before known to mankind.