“Low interest rates continue to support borrowers' mortgage affordability but a second round of lockdowns leading to increasing business bankruptcies and further unemployment could prompt house prices to contract,” said Mathias Pleissner, director in the covered bonds team and co-author of a report out today. 

At a country level, there are two diverging scenarios at play: countries that show a continued increase of house prices (some even showing higher growth rates) and .countries, including the UK, Sweden, Ireland and to a lesser extent Spain Portugal and Finland , where growth declined in the last two quarters.

"For countries currently showing a negative trend, Covid-19 is acting only as an accelerator for trends that started earlier," said Reber Acar, senior analyst in Scope's covered bonds team and co-author of today's report. In Ireland and the UK, prices were mainly driven by uncertainties around Brexit and EU agreements. This started to affect house prices from 2018 onwards.

In Sweden, house prices did not experience a material revaluation around the time of the GFC, so they are relatively inflated. Concerns around a potential housing bubble have been addressed by macroprudential measures, which have made investments into real estate less attractive. Hence Swedish house prices have remained relatively stable since the end of 2017.

Spanish and Portuguese house prices had partially recovered following the global financial crisis, but this was halted in the third quarter of 2019. In some Spanish regions, this reflects an already overheated market prompting price corrections, as well as slowing economic growth, and rising foreclosures .

There is a mix of countries showing positive growth compared to the historical trend. Most surprising is Italy, where after a very long decline and trough, prices are showing their first uptick.

“The new data show that the pandemic has not yet had a lasting impact on house prices,” Pleissner said. “Strict lockdowns and a high number of infections earlier in 2020 led to short-term impacts, often also reflecting lower transaction volumes. Thanks to strong government support measures as well as debt moratoriums, the supportive effect of the low interest-rate environment and high debt affordability prevails. The pandemic has not resulted in a reversion of the general trend. "

While the direct effects of the pandemic may only have a short-term effect on house prices, indirect effects may alter house prices longer term. If the global economy suffers more and longer than expected, this will filter through to national housing markets. Scope is forecasting a global contraction of about 4% for 2020 and a recovery of 6% in 2021. This year will represent the sharpest global contraction of the post-war era.

Download the full report here.