Coronavirus may trigger a huge housing crisis

Coronavirus may trigger a huge housing crisis
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The corona crisis is having an increasingly serious impact on the economy and everyday life of ordinary people in both Europe and the US. Experts point to a collapse of the residential real estate renting system. The clerks and office workers left without jobs can no longer pay homeowners. This also true of those who took out mortgages and loans to buy their houses and apartments.

What is happening reveals a systemic crisis in the entire Western economy.

While the world's media is discussing the malicious coronavirus, a much more severe economic crisis than it was in 2008 is creeping onto the center stage. 

The first wave of the crisis collapsed the employment numbers. In the United States alone, almost thirty million people lost their earnings over the past three months.

The second wave is the crisis of non-payments for rented housing.

On May 1, the monthly payment to landlords or property owners was due in the United States. Almost a third of American renters could not pay anything. The situation is slightly better in European countries, but even there, many tenants were forced to delay payment.

Some measures were quickly taken at the state level. More than twenty countries, including Spain, Great Britain and Germany, have urgently adopted a law prohibiting the eviction of residents from the rented apartments and houses until the end of quarantine measures, even if they cannot pay their rent.

In the United States, mayors of major cities have declared a moratorium on eviction of debtors. In New Jersey, the moratorium period is on 60 days after the state of emergency is lifted, while in New York the extension is till September.

However, no one is willing cancel the rent completely itself. This money will simply be credited to the debt that the tenants will have to reimburse to the property owner after self-isolation. In countries such as Greece and Spain, large homeowners are ordered to reduce their rent by 40-50%, but they still have enough options to circumvent this decree.

In addition, the US state guarantees for non-eviction can be very selective. In some states, for example, they only apply to those apartments and houses that are purchased with a mortgage, and the mortgage, in turn, is insured by Federal Agencies. This accounts for no more than a quarter of all real estate that is rented “officially”. Moreover, the owner may not inform the tenant about the fact that the latter has the right to live without paying rent. However, at the end of the quarantine measures, tenants will face an “avalanche of evictions” as the situation was colorfully described by the city Council of London. This is especially true for high-demand housing in megacities.

Some renters who lost their income are trying to organize “rent strikes”, calling on their governments to cancel the rent or pay it for them. However, there is almost no hope for this.

Of course, the suffering of families facing imminent eviction is heartbreaking. However, most landlords, especially small ones, are at risk of being affected as much as their tenants. The fact is that exorbitant prices for European and American real estate have recently become a new norm. People bought a house or apartment with a mortgage, and then rented out their piece of property in whole or in part. This helped pay the mortgage premiums. At the same time, even large homeowners who owned several pieces of property, after all those payments – utility, tax, mortgage – had very little money left in their pockets. Investors got into this in order to earn money, but quickly realized that the payments eat up almost all of the income.

Even if a person makes forty thousand dollars a year on all of his or her property, after paying their mortgage fees, utilities and taxes, they might have not more than ten percent at the end of the year. Therefore, the main income people still receive at their place of work. If he or she gets fired – they cannot live off their renting business.

At the same time, people paid hundreds of thousands of dollars for their  apartments and condos. Their monthly payments to service the debt and real estate maintenance may amount to $ 5,000 and even $ 10,000 a month – equaling all of their salary. The slightest interruption in payments at their job will inevitably force them to sell their apartments.

Now, millions of such small renters are forced to pay for their own mortgages and utilities, while their residents enjoy a coronavirus vacation. Even if the tenant may be expelled, it is completely unclear where to find new tenants. People who lose their jobs are forced to return to their parents’ or move in with friends or relatives. They don't have any money for rent.

Preliminary conclusion

There is a real danger looming over the industry that mortgage lenders will start selling their homes en masse, and this will lead to a collapse in property prices and a repeat, only on a larger scale, of the disaster of 2008.

What triggered the 2008 crisis?

The trigger of the great recession of that time was the crisis in the housing market. In an effort to prevent a repeat of this housing tragedy, the authorities are trying to give mortgage credit holidays. However, in the United States, a homeowner is only entitled to deferred payments if they allow non-paying tenants to live with them and if their mortgage is insured by a major Bank or Federal Agency. Less than a quarter of mortgage holders meet these conditions.

It is also impossible to completely cancel mortgage payments for a certain period. In the US, for example, banks often sell mortgage rights to pension funds. If mortgagees stop paying, pension funds will start going bankrupt. And this will lead to another facet of this problem that hundreds of thousands of people will lose their saving due to a reason that, it would seem, has nothing to do with the problems of homeowners and their tenants.

All this makes an ordinary economic difficulty, a truly systemic problem. Moreover, the problem appeared long before the pandemic and the COVID-19 only expedited it.

For a long time, real estate in Europe and the United States looked incredibly overvalued. Expenses for its maintenance also grew at a huge rate, significantly outpacing the growth of wages.

Western Millennials had little choice. They were forced not to buy, but to rent real estate. With the share of homeowners in developed European countries in the ranges from 35 to 48 percent, the possible crisis in this market has a crucial significance for the entire economy of the “Golden billion” countries.

The share of homeowners in the US has so far held at a higher level – about 65%. However, it should be borne in mind that these homeowners include those families who paid hundreds of thousands, or even millions of dollars for their property and now pay their mortgage.

For them, the ownership of a house or apartment has become a burden, aggravated by truly unaffordable payments to the Bank. Utility bills and taxes also take a huge part of the family budget. Falling real estate prices will lead to rapid bankruptcy of these families, because even if they sell their mortgage home, they will not be able to pay the Bank.

For a long time, the melting (shrinking) middle class survived by trying to somehow rent out their real estate. Now it seems that the rent lifestyle is a thing of the past and with the decline of rent, the existence of the middle class will also end.

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