The real estate crisis is a phenomenon that is spreading rapidly around the world and which evokes memories of the great financial crisis of 2007/09. A crisis that became global and was triggered by the mortgage loans in the USA, which the banks granted and in many cases the basic collaterals were absent.
The real estate market is facing new challenges as about $180 billion in real estate loans (residential or commercial) worldwide are under pressure. An amount which is four times greater compared to the credit of the next major industry.
Europe
Europe’s real estate credit risk levels are at their highest levels in a decade and it is the region facing the greatest challenges. UK commercial property prices plunged by 20% in the second half of 2022, while in the US the fall was 9%.
China
The first “bombshell” comes from Asia, specifically from China’s real estate market, being the largest in the world. Beijing’s strict zero-cases policy leaves little wiggle room, prompting the country’s biggest construction group Evergrande to file for creditor protection to avoid defaulting on its financial obligations.
The situation with the construction orgasm in China’s commercial real estate market is not expected to smooth out anytime soon.
in 2020 China’s property sector contributed around 29% of the country’s GDP, a level that is similar to that seen in Ireland before the financial crash of the first decade of this century.
The real estate market in the world’s second largest economy has entered a deep crisis. Warnings about its spread to the West are increasing. Warnings that came true, but preceded by Russia’s invasion of Ukraine, the subsequent energy crisis that sent inflation skyrocketing.
The reasons why the global economy came to be threatened once again by the real estate market.
1. The long-term policy of low interest rates
The decade of cheap money with interest rates at negative, zero or low levels predictably favored lending conditions. Construction companies engaged in an orgasm of construction activity, since the unhealed wounds of the previous crisis had left few opportunities. The real estate companies, who for their part recognized these opportunities and made real estate purchases, were also closely involved.
Commercial real estate development looked like the next big thing. But no one could have imagined what would follow: the advent of a pandemic.
2. The Pandemic Covid-19
The coronavirus brought other mores and customs to the global community, such as confinement at home, telecommuting and distance learning. A new employment model has emerged in the work environment, telecommuting and then the hybrid model with rotating office work or choosing to work some days from home and some from the office.
Commercial real estate, including office space, was suddenly emptied of workers. Businesses found that the pre-existing premises were no longer necessary and mostly had become unprofitable.
The new order of things brought new data: flexible working relationships, digital nomads, as well as more demands from the workers who seek better conditions.
The new reality is putting pressure on commercial property owners and construction companies, who are forced to shelve projects started before the pandemic, or seek new loans to complete those under construction.
But teleworking is giving a boost to the residential real estate market as demand increases and mortgages with it. Housing prices are registering a noticeable increase and now the acquisition of a new residence is becoming more expensive compared to before the pandemic.
3. The tightening of monetary policy
With inflation unchecked, central banks around the world are taking action: end cheap money and low interest rates, turn 180 degrees and raise them. This tightening of monetary policy has now made credit more expensive and is threatening the real estate market.
The “frozen” real estate market
The end of cheap money “froze” activity in the real estate market both in terms of construction and sales. Banks are sending a message to those involved: sell, or foreclosures won’t be long.
Falling activity in the construction sector is spreading throughout the economy and putting both jobs and growth at risk. In the US, home materials supplier Builders FirstSource has cut 2,600 jobs. Sweden’s Electrolux has announced plans to cut 4,000 jobs, most of them in North America.
Rising interest rates put further pressure on the real estate market as a number of potential loans default, while values and cash flows are under pressure.
The current situation in Europe
Amid the glut of cheap finance, property owners indulged in acquiring new assets after the crisis, as the cost of borrowing was lower than the return on real estate. Τhe result was that the real estate market has become the weak link in the junk category, with the probability of a bubble bursting in the next two years rising to 8%.
Already European regulators have warned that some projects in Europe will not be sustainable: weaker post-pandemic demand for office space, higher material costs caused by delays in supply chains and rising borrowing costs create an explosive mix.
Many landlords in Europe are being forced to drop prices as buyers disappear. Case in point in Sweden, where prices have been in freefall, Samhallsbyggnadsbolaget i Norden AB has agreed to sell properties worth up to $1 billion to pay off its debt.
The current situation in the US
Signs of a crisis have also appeared in the US. Although real estate remains overvalued, property prices are expected to fall between 5% and 10% in 2023.
Banks, for their part, emit danger signals, warning of losses. In its Q4 2022 earnings release, Bank of America said about $1 billion in office space loans are at risk of default. Wells Fargo, on the other hand, expects more pressure on the real estate market as demand continues to weaken.
