The building society noted a 3.8% drop in prices, marking the largest yearly decrease since July 2009. Nationwide pointed out that elevated mortgage interest rates presented a challenge to potential homebuyers’ affordability. July saw mortgage costs reach their highest point in 15 years due to uncertainty around the Bank of England’s interest rate..

Nationwide reported the average UK home price at £260,828, approximately £13,000 lower than the peak in August of the previous year. While the drop in house prices may be welcomed by first-time buyers, Nationwide highlighted that housing affordability remained strained due to higher mortgage rates.

Nationwide’s chief economist, Robert Gardner, explained that a first-time buyer with an average wage and a 20% deposit would allocate 43% of their take-home pay for mortgage payments at a 6% rate, whereas just a year ago, this would have been slightly over one-third of their income. Recent data also revealed a continued increase in mortgage rates, with a typical two-year fixed mortgage rate reaching 6.85%.

Gardner noted that the housing market had been subdued recently, with fewer completed housing transactions in June compared to the previous year. Rising mortgage rates followed a series of interest rate hikes by the Bank of England aimed at addressing persistent high inflation. An additional interest rate increase by the Bank is expected, which would mark the 14th rise in borrowing costs since December 2021.

Despite a slowdown in UK inflation to 7.9% in June, elevated food prices persist.

Although some lenders reduced fixed-rate mortgage pricing based on favorable inflation data, the anticipation of higher interest rates implies continued concerns about escalating mortgage costs.

According to Gabriella Dickens, a senior UK economist at Pantheon Macroeconomics, house prices might need to decline by about 8% from their peak to restore demand and supply equilibrium.

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London & Country, a broker, stated that lenders have been steadily withdrawing deals and raising rates, with more of the same expected in the coming week. Over the past month, mortgage rates have risen by approximately 0.5 percentage points, approaching an average fixed deal of 6%. On Monday, Santander became the latest major lender to temporarily withdraw new deals due to market conditions. HSBC also removed new deals for customers through brokers last week but reopened them temporarily on Friday.

This year, around 1.5 million households are expected to come off fixed mortgage deals, leading to a significant increase in their monthly repayments. The rise in rates comes after recent data showed that UK inflation is not declining as quickly as anticipated. Some predictions suggest that the Bank of England may raise interest rates higher than previously expected, potentially reaching 5.5% from the current 4.5%. This directly affects mortgage lenders, many of whom have raised rates and withdrawn deals from the market in recent weeks.

Santander announced that it would be “temporarily withdrawing all our new business residential and buy-to-let fixed and tracker rates” until Wednesday 14 June. David Hollingworth from London & Country explained that lenders were being compelled to reprice deals as the market shifted, and those with lower rates were facing a surge in demand. He noted that further repricing may occur this week but expressed hope that rates would stabilize and the market would calm down in the near future.

According to financial data firm Moneyfacts, the average two-year fixed-rate mortgage deal stands at 5.86%, while a five-year deal has reached 5.51%. In May of the previous year, these rates were 3.03% and 3.17% respectively, resulting in significant increases in borrowing costs for many households. When a fixed term ends, borrowers typically revert to their lender’s standard variable rate (SVR). However, brokers have warned that SVRs have significantly increased, meaning that borrowers who adopt a wait-and-see approach would experience a substantial jump in their interest rate, resulting in a much higher monthly mortgage payment.

Ian Stuart, the CEO of HSBC in the UK, acknowledged that it is a “deeply concerning” time for many customers. He highlighted the impact on monthly budgets when borrowers transition from old rates, such as 1.5%, to much higher rates, like 5%.

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For the approximately 2.2 million people with variable rate mortgages, this news brings further negative consequences. Roughly half of them have either a base rate tracker or discounted-rate deal, while the other 50% are on their lender’s standard variable rate (SVR). Those with tracker mortgages, currently at 5.25%, will see their pay rate rise to 5.5%, resulting in a monthly payment increase of £21 for a household with a £150,000 repayment mortgage and 20 years remaining. While this may seem like a small amount, it signifies a significant rise of a third in just under a year, equivalent to an annual increase of £3,000. For those with larger mortgages, such as £500,000, the monthly payments will rise by £69 to £3,439 as a result of the interest rate increase.

SVRs are subject to the lender’s discretion, but most are expected to increase, although not necessarily by the full 0.25 percentage points. Some lenders may take time to announce their plans, but homeowners should be prepared for higher payments.

However, the approximately 6 million households with fixed-rate mortgages are not affected by the recent rise. They will only feel the impact when their current deal expires and they have to renew, which could be in a few weeks or several years. Furthermore, there is potential for even more significant impacts in the near future, as the US investment bank Goldman Sachs has warned that the Bank of England might need to raise interest rates to 5% this summer.

In terms of new mortgages, the past few months have been challenging for those seeking fixed-rate home loans. The mortgage market has stabilized compared to the chaos following last September’s Truss government mini-budget. However, mortgage pricing is not directly influenced by the Bank of England base rate and depends largely on money market swap rates. These rates have been slowly increasing, around 0.3% higher than they were a month ago in April. Several lenders offer fixed-rate mortgages at around 4.05% for buyers not borrowing more than 75% of the property’s value, and rates around 4.45% for first-time buyers with a £20,000 deposit.

On the positive side, savers may benefit from the interest rate rise. In the past, the best easy access savings rate was only 0.67%, but the successive rate increases have improved the situation. However, the highest-paying instant access account currently offers 3.71%, while the current rate of inflation stands at 10.1%. Online savings providers have been raising their rates to attract customers, and those willing to lock their money away for a year can receive 4.91% from certain providers.

Unfortunately, more people are expected to fall into arrears due to the interest rate hike. Last month, an estimated 700,000 UK households missed or defaulted on rent or mortgage payments. Advice has been given to those struggling to contact their lenders for support to avoid impacting their credit ratings. Missed payments could stay on credit files for up to six years, potentially leading to mortgage arrears, legal action, and even repossession.

Regarding credit cards and loans, new applicants can anticipate higher interest rates. However, existing borrowers with fixed-rate personal loans will not experience changes in their monthly payments.

In summary, the recent increase in UK interest rates will have significant implications for various financial aspects of individuals’ lives. Mortgage holders, especially those with variable rate mortgages, will face higher monthly payments, while savers may.

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A study released by the Association of Real Estate Agents of Portugal (ASMIP) with its members, found that 56.5 percent of the mediation companies have lost “all contracted deals in the last two to three weeks”, about 33 percent are currently “inactive”, while 52 percent “are working only half the time, completing processes that come in, but without access to new customers and products”.

In this context, the association said in a statement, the surveyed companies said they were “in a financially bad situation, but for now stable”, if the stoppage of the activity is not too long.

“Some say they are taking the time to restructure companies to the new reality, reorganising real estate files and clients and contacting them in order to keep the relationship alive and even to meet virtually whenever necessary,” notes ASMIP in relation to the work now being under taken by those in the sector.
The 25 percent of companies that are still making visits to properties, guarantee that this “only happens in very exceptional cases, is limited to one person, and is only to complete a process that was already underway”.

As they explain, “with new customers this does not happen, due to the state of emergency restriction, but also because there are no customers available to do so”.

Among the respondents, 68 percent say they have seen business cancelled, and of these, about half point to the cancellation of up to 10 percent of the deals they had concluded and the other half to the loss of 20 percent to 30 percent of those deals.

Figures that, according to ASMIP, show “the high damage in the often weak financial structures of real estate companies, sustained in a continuity business that, suddenly, suffered an abrupt cut”.
With regard to the execution of deeds, the survey points to the cancellation of 46 percent of the total, and, for half of the companies.

Among the surveyed real estate companies, 56.5 percent said they had lost business that had already been contracted, that is, in addition to the stoppage of activity since the beginning of the quarantine, more than half of the companies stopped concluding businesses in which they had been working for days, weeks or even months.

Asked whether the use of multimedia platforms would be enough to keep customers interested in looking for a home, almost two thirds (65 percent) of respondents rejected this possibility, with 98.4 percent reporting a lower customer demand for the acquisition only by this route and 75.8 percent referring to the same in the case of leasing.

In this context, 60 percent of companies guarantee that they are already taking measures to achieve a return in activity, although the overwhelming majority point to the existing uncertainty.

“Companies that survive will go through painful cost control processes, learning to live with much less than they have hitherto, since the market will be significantly reduced, at least in the short term”, considers Francisco Bacelar, the president of the association.

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Even though we don’t yet know what we’re in for—as Dr. Fauci says, “you don’t make the timeline, the virus makes the timeline” —we can start to think about the consequences for real estate markets.

The 2008 recession was a catastrophe for real estate. Home prices in some local markets dropped 50% or more. If you bought a home or invested in a rental you lost your shirt. Why won’t that happen this time?

Because this time home prices all across the nation aren’t pumped higher than incomes, this time five million people haven’t bought homes with subprime mortgages they can’t afford. This time, if the recession is short, there won’t be mass foreclosures and a glut of homes on the market.

It’s true that there are price bubbles now in Phoenix, Tampa, Las Vegas, Denver and Miamifor example but these are moderate by 2008 standards and, more importantly, prices in most local markets are in balance with local income.

First we do need to imagine what this recession will look like. If in fact the virus will peak anytime soon (in a matter of weeks, months?) we can be pretty sure that we’re facing a compressed but “normal” recession that has predictable outcomes. I think that’s what will happen, but it’s not too hard to imagine other scenarios where a larger catastrophe awaits.

A compressed but normal recession would look a lot like the 2008 recession, but faster, deeper and shorter. The chart below shows what that recession looked like from the point of view of consumer spending and job losses. Starting at the beginning of 2007, it shows by month the annualized change in retail sales and in job growth

The drop in retail sales maxed out at 12% and the loss in jobs at 5%. People started buying things again at the end of 2009 even though jobs hadn’t yet recovered. Spending creates jobs.

The 2020 recession could easily see sales drop 20% and job losses go to 10% (16 million jobs). That will happen quickly. This can be seen by the quickly growing list of retail companies on bankruptcy watch. With government help a recovery can start soon after the virus has peaked, although nothing will be over by the end of the year. Our economy isn’t built for a quick bounce back to normal. Even a compressed recession will have a drawn-out and fairly modest recovery going deep into next year.

The 2020 recession will bring the price bubbles to an end, with maybe a drop in home prices in some markets of ten percent over the next few years. But prices in most local markets will at worst be flat.

This amounts to a fairly rosy scenario in the current circumstances. It’s not very different from my expectations a few months ago—before COVID-19 was even a word—when I already thought a recession was on the way. But one of the lessons we learned from 2008, because we didn’t do it then, is that quick help for consumers and homeowners is actually the fastest way out of a recession and (it’s an election year, after all) this time I think they’ll get it.

That depends on how much confidence they have in the idea of a sharp but short recession. It’s not hard to imagine a much longer one that destroys real estate values, in which case you want to get out of real estate as fast as you can.

But if we do see the pandemic peak in a few months, if the government does steer more funds to consumers and does help people with mortgages, there’s no sense in getting out of real estate because it’s one of the goods that will be in short supply for years to come.

A crisis is often a catalyst to accelerate trends we already knew about. I think the recession will push more people towards renting, will paradoxically push more people to live in cities (despite the higher risk of epidemics) because that’s where the best healthcare is located, and will encourage more ‘hub and spoke’ development where homes and rentals are grouped within walking distance of public transport to the city center.

This is not a time when investors need to act fast, better to see what timeline the virus sets (besides, I could be very wrong), but in the meantime they can figure out where the trends will create the best opportunities once this nightmare is over.

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Just 69% of renters paid their rent by April 5, according to data from 13 million units published by the National Multifamily Housing Council, compared with 81% who paid by March 5, providing an early look at how bad things could get if job cuts continue and households blow through savings. In one scenario, renters would need $96 billion in payment assistance over the next six months, according to an analysis from the Urban Institute. It won’t be much better for homeowners. Roughly 15 million households—about 30% of mortgage borrowers—could miss payments if the economy stays shuttered through the summer, according to Mark Zandi, chief economist at Moody’s Analytics.

So far the local, state, and federal governments have responded by imposing temporary bans on foreclosures and evictions, dulling the short-term impact of the economic shutdown in the hope that social-distancing efforts ease later this spring and consumers and businesses get back on track. Those measures won’t be enough, though, if the economy doesn’t rebound quickly. “The initial thinking behind it seems like it was that this is going to last a month or two, and things will go back to normal,” says Tomasz Piskorski, a professor at Columbia Business School, who favors forgiving some interest payments for affected mortgage borrowers. “It buys us some time. But it’s going to take months or years to get back to a new normal.”

The prospect of missed payments is causing problems across the landscape, as economic pain spreads from tenants and property owners to lenders and beyond. Real estate investment trusts that invest in mortgages, many of which committed the cardinal sin of using short-term debt to finance long-term assets, have been forced to sell mortgage securities at deep discounts to meet margin calls from their lenders. That dynamic was a hallmark of the global financial crisis, but this time around it’s harder to argue that distressed households or corporations were greedy or reckless, or that they should have been better prepared for an unprecedented economic shock.

Tom Barrack, chairman of real estate investment trust Colony Capital Inc., argues that real estate finance companies and other nonbank lenders are the pipes that provide liquidity to businesses and individuals, so backstopping mortgage investors is critical to helping small firms and their workers. But he’s not optimistic about government intervention. In an election year, it doesn’t look good to bail out industries perceived to be overleveraged, he says.

Similar problems are festering throughout real estate. The Coronavirus Aid, Relief, and Economic Security Act, passed in March, provides forbearance on government-backed mortgages. Those loans are packaged together and sold as securities, and when homeowners miss payments, mortgage servicers are required to advance principal and interest. That’s problematic for servicers, who’d need up to $100 billion, according to preliminary estimates from the Mortgage Bankers Association.

They’re not the only ones who will need help. At least 2,600 commercial real estate borrowers have already touched base with mortgage servicers about potential debt relief on more than $49 billion in loans, according to Fitch Ratings. More than 75% of those inquiries, made during the last two weeks of March, were for hotels and retail real estate, Fitch said.

What happens next for renters will depend on where people live and how their buildings are financed. Some states have passed temporary bans on evictions, and Fannie Mae and Freddie Mac have promised forbearance to apartment owners suffering hardship because of Covid-19 on the condition that the landlords pause evictions.

Only a quarter of renters live in units financed with government-backed loans, says Mary Cunningham, a vice president at the Urban Institute. Most property owners will have to make arrangements with their lenders as collections fall. Small landlords in particular lack access to the cheap credit needed to weather the storm, and even people who rent from larger companies are unlikely to get the same level of forbearance as homeowners do. Sean Dobson, chief executive officer of Amherst Holdings, which operates about 20,000 single-family rental homes, says his company will offer forbearance “as long as we can. But we don’t have the Federal Reserve to lend to us.”

After a decade in which tight housing inventories have allowed landlords to hike rents, there’s a sense that property owners have had their power diminished. A chorus of voices, from local housing activists to Representative Rashida Tlaib, a Democrat from Michigan, have called on Congress to cancel rent. Another set worries that eviction moratoriums will give renters permission to skip payments that landlords will never get back. “The politicians are commanding that you can’t evict people, and obviously that leads to a lot of behavior changes,” said Jeffrey Gundlach, chief investment officer of DoubleLine Capital, in a recent webcast.

It’s not just apartment dwellers who can’t pay rent. Companies including Subway Restaurants and Mattress Firm Holding Corp. have informed landlords that they may not be able to make rent payments in full. For now, there’s not much commercial landlords can do: A global pandemic is a tough time to find a new tenant.

Rents must be paid eventually, and landlords will have claims even in bankruptcy. In cases where businesses shut down because of government order, tenants will pursue claims of force majeure, arguing that their contractual agreement has been superseded by social-distancing decrees. Landlords may make the same case to lenders. The blameless nature of the crisis could make some problems easier to solve, lowering resistance to government bailouts. A bigger challenge may be mustering a strong response during a crisis in which officials worldwide have repeatedly been slow to take decisive action.

“It’s almost like we’re watching this unfold in slow motion,” says Scott Rechler, CEO of RXR Realty, which owns apartments, offices, and other commercial real estate. “We know the bad part is coming, but we don’t know how long it will last or how resilient we’ll be.” —With Shahien Nasiripour

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