Is A Real Estate Crisis Inevitable Due To Coronavirus?

Impact On The Real Estate Industry?

Hitting the pause button

The impact that Coronavirus might have on the real estate industry is impossible to measure yet. Very few official figures are available as the situation is too recent. However, we know that daily average apartment sales fell 90% in Seoul, South Korea (RealDeal).

In Italy, home sales in the first two months of 2020 were down 7 percent year-over-year in Lombardy, and down 12 percent in Milan. But Italy detected its first coronavirus cases on January 29, shut down schools five days later, and declared a total lockdown on March 9.

What we know: downgrade, decline, and crash

So, whatever figures can be communicated, it is way too early to measure the impact on real estate. What we know for sure is that:

• the OECD downgraded its forecast on economic growth
• the declining oil prices will have big consequences
• and finally, the huge stock market crash is making trillions of dollars disappear from the economy (Forbes): is it $7.3 trillion (investors.com, 3 March)? Or $11 trillion (CNBC, 12 March)?

On February 19, total U.S. market value was just over $35 trillion, but it’s since fallen to $23.8 trillion. Therefore, coronavirus crisis wiped out more than $11 trillion in value in less than one month.

CNBC

Therefore, we can’t measure yet the impact of coronavirus on real estate, but we do know that there will be consequences. Which countries will suffer the most? This is still hard to determine.

Frequently Asked Questions

Obviously, people are worried and they have real-estate-related questions. For example:

• Can I stop paying my rent?
• Should I cancel my real estate acquisition because of coronavirus?

Indeed, those are questions to consider seriously, as most people are affected directly by the economic crisis created by the coronavirus situation.

Before we get to Q&A, let’s talk about some key figures, to understand today’s crisis.

Only 0.002% of the world population is infected by COVID-19.

Why Are We So Scared of the Coronavirus?

The coronavirus killed 5,416 people and infected 145,336. Even if this health crisis is extremely serious, most governments are taking the necessary measures to prevent it from killing millions of people. As we analyzed yesterday, we are nowhere near a health crisis such as the Spanish Flu crisis (1918-1920). This Spanish Flu caused 50 million deaths worldwide.

Do we remember how bad this Spanish Flu was? Let’s refresh our memory.

The Spanish Flu killed 50 million people in 1918-1920

While the coronavirus health crisis is serious, most governments are reacting well to minimize deaths. Therefore, we should not get to 50 million dead people with COVID-19, unlike it happened with the Spanish Flu.

By the way, the term “Spanish Flu” is misleading. Indeed, this was a global influenza pandemic which killed, between 1918 and 1920. It was not contained to Spain at all, and killed:

• 5 to 9 million people in China
• 675,000 people in the U.S.
• 18 million people in India
• 50 million worldwide

About 500 million people got infected, representing one-third of the world’s population. And 10% of them died. With only 0.002% of the world population infected by the Coronavirus, one might wonder why things are so bad economically.

Well, that’s because of the lockdown imposed on economies. As people as asked to stay at home, the economy is coming to a halt. But why do we impose such a lockdown? Because of how the Spanish Flu contaminated 500 million people a century ago, and killed 50 million people globally.

Indeed, the Coronavirus “could infect 60% of global population if unchecked” (TheGuardian). Governments are doing everything to avoid it (stopping the economy), hence the economic chaos, and the Stock Market Crash.

In April 2015, Bill Gates (co-founder Microsoft Corporation) analyzed the Spanish Flu and the Western African Ebola virus epidemic, sending a clear warning that we’re not ready for a virus outbreak. Was he right ? Now, it seems trivial to recognize that we should have transformed organizations such as the WHO, to get an army of doctors ready in case of outbreak:

However serious today’s situation is, and yes it is very serious, we can’t help but observe that the economic situation is going to be much worse than the health situation itself.

Top 4 Real Estate Questions Asked Because Of Coronavirus Economic Crisis

Tenants, property owners, and real estate agents want some questions answered, as the coronavirus situation is creating economic problems in real estate.

Here are some frequently asked questions related to real estate and coronavirus:

1. Can I cancel my airbnb booking, and get my money back?
2. Should I stop paying my rent?
3. Can I delay my mortgage payments?
4. I was in the process of buying a home. Can I cancel the acquisition, drop out of the deal?

All of these are great questions. And yes, we can give answers.

Can I Cancel My Airbnb Reservation?

Airbnb expands its penalty-free cancellations (CNN) due to the travel-bans. However this creates a problem as “travelers want their money, back but hosts need their income” (Bloomberg).

Airbnb set up a dedicated policy called “Extenuating circumstances policy for the coronavirus (COVID-19)”. However, France is not part of these exceptions, neither is Spain. Only reservations made in Italy, China, South Korea and the United States are applicable.

Therefore, this list is not exhaustive and does not solve all problems for tenants. For property owners, it’s even worse, as flats are now empty, while mortgage payments are due to the banks…

Can I Stop Paying My Rent?

How can people pay their rent if they can’t work?

So far, no government communicated on this. Are they waiting for people to get evicted? No, but they’re likely busy with other priorities first. But this will be a major problem soon enough, in many countries.

In the UK and the U.S., actions were conducted already. Indeed in the United Kingdom, a petition asks the government for rent freezes. Similarly, New York but also San Jose (California) lawmakers “move to ban evictions during the coronavirus outbreak” (Curbed.com, FastCompany.com).

But if governments suspend evictions, what will become of property owners? Can they also stop reimbursing the bank, delaying mortgage payments? Let’s answer this question too.

Can I delay My Mortgage Payments During The Coronavirus Crisis?

For now, only Italy made that possible, which I believe is a great government initiative. Indeed, the Italian government pro-actively intervened to allow home-owners to suspend monthly mortgage payments (Housingwire).

A mortgage holiday seems to be a necessity in many countries, especially if tenants can cancel their Airbnb bookings, or stop paying their rent and not suffer eviction, as it is being suggested or done in some countries such as the UK, France, the U.S.

So, will there be a“mortgage holiday” for everyone, globally? Not likely, of course.

However, in many countries including France, a mortgage can be suspended in case of loss of revenues, among other reasons. Therefore, homeowners should read once more the contract they have signed with the bank, to see whether they can suspend their loan payments.

America’s mortgage market is much bigger than Italy’s $423 billion of outstanding home-loan debt. The U.S. has about $11 trillion of mortgages 

Housingwire

I Was Buying A Home. Can I Cancel the Acquisition, Drop Out of the Deal?

Can I cancel a real estate acquisition because of the current coronavirus crisis? Many real estate agents worldwide get asked this question by buyers who are already committed.

So, can you get out of the deal ? Well, it depends on what paper you have signed already.

Indeed if you are already legally obliged by a contract, you have to respect it. This principle is called Pacta sunt servanda, which is Latin for “agreements must be kept”. It is a basic principle of civil law, canon law, and international law.

However maybe you’ve made an offer, and are now in the process of getting a mortgage. Well in that case, provided that you get rejected for a mortgage and that you previously inserted a condition precedent in your offer about the obtention of the mortgage (fairly common in France for example, called “clause suspensive d’obtention de prêt”), you can get out of the deal.

Why would you want to get out of the deal? Well, many reasons exist. Let’s talk about a few of them.

Should You Buy Real Estate now?

There is no “yes” or “no” answer, but there are elements to consider.

Difficult times for property owners

Airbnb bookings are down 96%

Cancellations of bookings on Airbnb and short-term rental platforms are immediate consequences of the coronavirus crisis. For example, bookings made in Beijing are down 96% according to Airbnb’s data (WallStreetJournal). In multiple real estate markets, this will create crisis whenever the property owner can not suspend his mortgage repayment.

400 million students can’t go to school

As of 13 March, “61 countries in Africa, Asia, Europe, the Middle East, North America and South America have announced or implemented school and university closures” (Unesco). In total, 421 million children and youth can not go to school due to COVID-19. However this number is under-valued, because Spain and France are now both applying country-wide school closures. So the number is more likely above 500 million already.

Student-rentals are therefore hit hard. Schools and universities are shut down in many countries. As a direct consequence, bookings on student-rental platforms are cancelled. Even more so when it concerns international students (5 million people), who fly back home.

Then again, think about the homeowners: if they don’t receive rents from tenants, either they can suspend mortgage repayments or they are in an uncomfortable situation.

Is A Real Estate Crisis Inevitable Due To Coronavirus?

How The 2008 Financial Crisis Helps Us With COVID-19

The financial crisis 2008 is behind us, so we have had time to analyze it properly. Real estate prices didn’t react it to the crisis in the same way. A few examples:

• Spain was very badly hit (-41%), and still hasn’t recovered its pre-2008 prices
• U.S. house prices were also badly hit (-34%)
• UK property prices were also badly hit (-26%) between 2006 and 2012
• France was barely affected: property prices kept increasing
• Brazil wasn’t affected either

We can’t analyse how the coronavirus might impact real estate, unless we zoom-out. In 2008 on average, U.S. house prices fell by 34%. For example, New York house prices lost 25%, while Los Angeles and San Francisco lost 40%. Phoenix lost 54%.

But this evolution took years: “prices fell by 34% in real terms in the six years to 2012″ (Economist.com). Notably, the decrease started in July 2016, and ended in February 2012.

However there is one big difference we shouldn’t forget. Indeed, the Stock Market Crash of 2008 started with a housing slowdown (the balance).

On average, U.S. house prices fell on average by 34% during the Great Recession

MarketWatch, Economist

What about 2020? Will the Coronavirus Create A Property Market Crash?

The New York Times puts it clearly: “Whatever it is that is happening now hasn’t hit the housing market yet, but it probably will. Stocks have fallen, entire industries are putting themselves on pause and all manner of small businesses are taking hits.”

Christine Lagarde, the president of the European Central Bank has warned that the coronavirus outbreak will spark an economic downturn in Europe similar to the 2008 financial crash unless EU governments provide financial support for their economies.

The three billion-dollar questions are:

• Can house prices fall as much as the stock market?
• Is now a good time to sell, or a good time to buy?
• Which real estate markets are going to suffer the most this time?

To answer these questions, please read these articles I wrote, which will give some tips. Naturally, nobody knows, but at least these give some indications:

• Housing bubble risks – how to identify a future real estate crisis?
• Is the French Real Estate Market Going to Crash?
• Real estate or stocks: buy when people sell, sell when people buy