Aggressive monetary expansion and a slowdown in construction activity have underpinned surging property prices. Both dynamics will keep fuelling the rally

In the decade following the global financial crisis, unprecedented low funding costs and the search for yield underpinned the sharp reflation in global property prices, particularly in metropolitan areas. Having recently come off the boil, property prices are once again on the move as a result of the aggressive monetary policy response to the Covid pandemic and lockdown-driven supply constraints.

Charts source: Bloomberg and Variant Perception

Property prices across Europe have surged at the same time that equities have in most cases failed to fully recover the pandemic losses. Property markets that have previously run hot are among those chalking up the strongest price gains in 2020 – Netherlands, Germany and UK property in the 10-years to 2019 appreciated 22%, 58% and 37% respectively (using comparable data from Eurostat).

Charts source: Bloomberg and Variant Perception

Compounding the impact of demand inflation, the supply side has been hit by a slowdown in construction activity. While the manufacturing and service sectors across the euro area have recovered somewhat, PMI data show the construction industry continuing to contract. Even in the UK where the construction PMI is back in expansion territory, the inherent lag time between housing starts and completions suggests that the pandemic will have resulted in a persistent supply backlog.

Charts source: Bloomberg and Variant Perception

Even as residential construction supply comes online, monetary policy will remain extremely accommodative and keep property prices bid.

Charts source: Bloomberg and Variant Perception

Finally, changing work patterns as a result of forced work-from-home rules are likely to be one of the lasting impacts of the coronavirus crisis and could continue to fuel property prices outside of major metropolitan areas long after the virus is brought under control.