The world health organization (WHO) officially designated Coronavirus as a pandemic. With millions of infected cases, and deaths that have crossed 300,000 and growing daily – this disease is a potential catastrophe likes of this the world has not seen in recent times.
Statistics strongly reveal that this pandemic can change the way we live. It has had a major impact on real estate markets. In the United States of America, mortgage rates have fallen and reached three year low. It is claimed that the overall growth rate of the country will decrease by 2 percent. And, the net value of this loss will sum up to 2.7 trillion USD.
Coronavirus Real Estate Empact
A lot of people are curious to know if the volatility caused to the country’s economy will have an impact on real estate. Some claim that there is no direct bond between the stock market and the real estate. But, is this true? The overall health of real estate depends on the economy of a country. It depends on the place, and the kind of wealth it holds.
The economic conditions were quite strong before the outbreak of coronavirus. And, when the deadly virus started to impact more and more lives, economy started to see a difference. This rippled down and affected both the stock market and real estate. The impact is there – but it depends on the consumer too. Inspite of COVID-19, people who have a steady inflow of money, and are financially stable will continue to spend. This means, there are chances of them investing in real estate when the prices are low.
The Bright Side
What truly affects real estate would be the treasury bond prices. The connection between real estate markets and these bonds is inevitable. The value of treasury bonds correlate with mortgage prices.
When stock markets and other forms of investments become volatile due to times like COVID-19, people have the tendency of moving their finances bonds. They believe that bonds can be related to financial security and stability. As a result, the demand for treasury bonds starts to increase. Meanwhile, the yield of these bonds will not change drastically. Instead, people will be tempted to buy treasury bonds at a higher price, and eventually yield at lower rates. (technically the yield decreases because the interest paid is reduced). This is one of the main reasons why the overall mortgage rate goes down. Mortgage rates have dropped by 3.7 percent due to the pandemic.
It is important to understand that the catalyst for the current economic situation is different from what happened in 2008. The issue in 2008 was triggered by the primary lending market. At that time, sub-prime mortgages were collected and sold at a value greater than the actual amount. Eventually, all homes that were mortgaged by this amount ran into default. This is also known as “Credit Default Swaps”. Large investors were bankrupt due to this incident, and it triggered multiple domino effects. Many crucial aspects of the economy were affected by credit default swaps.
Fortunately, the Coronavirus real estate scenario is different. The present state of the real estate market is not caused due to volatile stock markets. Instead, it is triggered because of uncertainties. There is little insight on how long and how Coronavirus can impact supply chains and the earnings made by corporate companies.
Experts strongly believe that the real estate market will remain protected for various reasons. For example, reduced mortgage rates, increased buyer demand and closed residential inventories can have a budding effect on real estate. In fact, the prices of oil and lumber have also reduced. This is yet another reason why even with coronavirus, real estate will remain stable in-spite of the current situation.
Now, this is just one side of the story. Something that feels more or less like a fairy tale. Let’s dig deep into the other side of the impact of coronavirus on real estate.
The Other Side
As we pen down this post, more than 90% states have mandated the shutdown of businesses, apart from the basics and restaurants. Even restaurants are only aiding with take away and home delivery orders. Everything else has come to a halt. Whether it is Disney world, or your favorite ski resorts or your much loved bowling alleys – everything is closed. Above all, the scope of travel into and around the country are blocked. Of course, these announcements are temporary. But, they tend to have an impact on the decisions we make.
The fact that businesses might be able to pull together these tough days doesn’t guarantee that employees can. The impact on employees is quite straightforward and direct. Income and hours are not their only concern. In fact, many employees fear the idea of losing their jobs. This will definitely have an impact on the real estate market. When employees are not paid, and when unemployment becomes the next biggest thing – how will real estate survive?
The moment people lose jobs and see major reductions in their hourly wages, overall disposable income comes down. This will trigger them to save more money and spend less. According to experts, this is a golden principle that can affect a country’s economy. When people spend less, face unemployment and the growth of income declines, the GDP of USA will decrease. And, these are important aspects of building a strong real estate market.
Now, let’s understand this with the employers in mind. The impact of Coronavirus will definitely decrease their annual revenue. When their revenue drops, they are more likely to fire employees. Employees who are laid off will not have much money to spend. In the long run, they might be forced to take out money from their retirement funds and investments. Once again, the viscous cycle begins.
All of the above discussed incidents will force the real estate coronavirus market to reach a tipping point. The real estate market strongly needs to strike a balance between high demand and low supply. This is when the real estate industry sees big returns. Unfortunately, the impact of Coronavirus on employment and employer revenue changes the whole picture.
Skilled investors tend to keep a close eye on how the real estate market reacts. They educate themselves of how the mortgage rates change, and how the government reacts to the situation.
When the country’s GDP drops for two years in a row, it signals recession. With recession, employees will have lessor wages and reduced income. Thus, renters and buyers will not be able focus on real estate.
The big impact of Coronavirus on Real Estate
Hospitality based real estate will be influenced greatly. Most hotels and restaurants will be affected. In fact, it would take months for these businesses to recover. Any business that is in its planned construction stage will be on hold for an unseen period of time.
Commercial real estate is broken down into multiple sections. You have offices, warehouses and retail. Each of these entities will be affected differently. With shift towards online shopping retail will suffer but demand for warehousing will go up as companies will like to stock up and sell their products on the internet.
With the above discussion, don’t conclude that there wouldn’t be sunnier, brighter days. Even with the previous recession, real estate bounced back from 1.9 to 4.8 percent increase in prices.
A quick summary
The following are the impact of coronavirus on real estate:
- New development projects will be on hold.
- Real estate investment trusts are hit hard by the current state of volatility.
- Demand (buyers) will decrease, and supply (sellers) will increase.
- Social distancing and quarantine will reduce the growth of commercial real estate except for warehouses. This will result in loan defaults, especially the commercial ones.
Coronavirus will negatively impact all investments that include stocks, businesses, commodities and real estate. However impact of coronavirus on real estate is likely to be the least due to lower interest rates which in some countries are close to zero.