Potential effect of coronavirus on real estate

By: J. David Chapman/February 20, 2020

Industry insiders are calling it the coronavirus effect. I have been asked what effect the coronavirus is having on real estate. The outbreak of the virus from China, which has sickened thousands around the world and raised concerns of millions more, is taking a toll on global financial markets and promises to have consequences on our real estate markets.

According to Lawrence Yun, chief economist at the National Association of Realtors, China has been the most important source of foreign demand for U.S. real estate. Wealthy Chinese buyers have a strong appetite for luxury high-rise condominiums, and he predicts that the virus in China will cause upper-end luxury properties in California and New York to be softer as a result.

While luxury property prices may be affected, it may be mortgage rates that are affected most. As I write this, there are approximately 19 confirmed cases of the virus on American soil, so it may seem perplexing that a virus that originated in China could result in lower mortgage interest rates across the world. You can thank globalization. China is the world’s second-largest economy and affects global financial markets. With market disruption, investors tend to pull money out of the stock market and park it in safer, more stable U.S. Treasury bonds. Typically, when bonds are strong, mortgage rates fall.

According to NAR’s Yun, the outbreak may make it more difficult for Chinese buyers to pick up U.S. properties for now, but it could be a boon for the luxury market in the long term. “(Chinese) people who are wealthy may feel tired of the perception of China as being a third-world country,” says NAR’s Yun. “They want to park their money in a first-class world economy, which is Australia, Canada, and the U.S. Hence, we may see greater demand from Chinese wealthy households.”

Interestingly enough, my contacts in large cities in the U.S. claim the recent developments in China are simply confirming what has been common knowledge for some time – the once-booming market for mainland China buyers has slowed, amid tight capital controls and trade tensions. Many of the commercial brokerages are focusing on the Chinese-speaking “rim” countries of Taiwan, Singapore, and Hong Kong, where geopolitical issues are not as prevalent.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).