Financial-industry predictions of a limited global real estate correction may prove overly optimistic. The COVID-19 pandemic and the governmental measures adopted in response have produced an economic shock of exceptional scale, with economies around the world experiencing severe contractions.

By June 2020, the IMF had revised its forecast for global growth to -4.9% for the year, reflecting a deeper downturn than previously anticipated, weaker consumption and investment, and an uncertain recovery.

The consequences for real estate are significant. Property markets depend heavily on employment, business activity, credit availability and investor confidence. As businesses struggle with reduced revenues and households face greater financial uncertainty, liquidity pressures can increasingly feed through into property markets.

The danger is particularly acute where property valuations have already been supported by high levels of leverage or where economies have become excessively dependent on real estate investment. A prolonged downturn could therefore create a negative cycle in which weaker economic activity reduces property demand, falling values weaken balance sheets, and tighter liquidity further reduces investment.

The immediate impact will not necessarily be uniform. Some residential markets may remain relatively resilient, while commercial property, hospitality and retail could face much greater pressure as business models and patterns of work change.

Nevertheless, the combination of economic contraction, reduced liquidity and extraordinary uncertainty creates the conditions for a more severe and widespread real estate downturn than many industry professionals were anticipating.

As I argued earlier in COVID-19 and the Pending Collapse of Real Estate, the pandemic could expose structural weaknesses that were already present in property markets before COVID-19.

The question is therefore not simply whether real estate prices will fall, but how deeply the economic shock will affect property values, financing and investor confidence—and how long the adjustment will last.