The Reality of Realty after the Corona
What will the real estate world look like the “Day After ” ? This is the question I am being asked by my buyers, sellers, friends and colleagues. Seminars, Zoom sessions and Whatsapp groups abound trying to calm realtors who were affected almost as hard as the tourism, recreation and restaurant industries. I may not have been born an optimist but being in the real estate industry for over 20 years has surely made me one. Although I am not old enough to have lived through the Spanish epidemic of 1812, I have lived through multiple wars, terror attacks and intifadas to have experienced first-hand how the real estate market in Israel reacts to a national crisis. No one can accurately predict the “day after” regarding any industry, but we can look at historic events and current circumstances to get an idea of what could reasonably happen. In a normal market, real estate fluctuations are usually affected by “supply and demand”. This is one of the reasons that property values in the crowded city areas, where land and new construction are scarce, have historically continued to rise. Appreciation in these areas has been consistently rising over the last decade, as opposed to peripheral areas, where prices appreciate at a slower rate. Depending on the area of the country, various historical events have definitely had an influence on property values in Israel. During the Second Intifada that began in Sept. 2000, property values in Jerusalem went down significantly before beginning to rise again, and that trend has continued until today. Terror and war are strong influencers in the real estate market, as are economic sanctions and public protests, such as the social equality protests in Tel Aviv in the summer of 2011, and again in 2015. Government regulations regarding the purchase tax and various incentives that the government has tried to implement to entice young families to purchase apartments have not helped alleviate rising prices or the constant demand. The Bank of Israel’s rise in interest rates over the years have also had an impact on real estate prices, since many buyers depend heavily on financing, especially among younger sector. When purchasing power is limited, sellers must respond accordingly in order to be able to sell their homes.
Although we have never encountered a “crisis” such as this one in the real estate world, the comparison to other market challenges are similar in terms of the psychology of buyers and sellers. Worried buyers who are now seeing interest rates for mortgages rise in all the banks, will be more cautious and have less available funds. Although the Bank of Israel has recently lowered the prime lending rate to 0.1%, this only benefits those loans that are linked to the prime lending rate. Many mortgages are comprised of multiple components, because by regulation, only 1/3 of any mortgage can be based on the prime rate. Therefore, since the other variables in the mortgage are not affected by this, the borrower won’t see a dramatic change in his/her monthly payment. The good news is that, although banks have not yet come forward to lower mortgage rates, they have offered borrowers a ‘grace period’ of 3 months without having to make monthly payments. These unmade payments can then either be added on to the end of the mortgage, delaying the final payoff of the loan, or the remainder of the loan can be re-amortized, increasing the monthly payments slightly, but allowing the borrower to pay off the loan according to the original timetable. The banks are not forgoing any payments or accrued interest, just giving the borrower some breathing room to accommodate for the current crisis, thereby reducing the risk of foreclosure on the property.
For investors thinking that there will be a surplus of bargains on the market due to foreclosures, this may not be the case. Some sellers may lower prices for other reasons. Layoffs due to the Covid19 crisis will cause owners to be more cautious about their future, since they will have limited funds to continue paying their mortgages. The post Covid19 economy may cause many business closures and job losses, which could result in families deciding to sell their homes and go into rental situations. This would allow them to liquidate the equity in their property and use this money to cushion them through the tough financial period ahead. Although they may not lower their sale price dramatically, they will be more anxious to sell depending on their current financial cushion and be more flexible in negotiations with potential buyers. Any surplus of properties that would enter the real estate market will also give buyers more options to purchase and create more supply in cities where demand had previously outweighed supply.
The isolation and quarantine have created some interesting revelations for families. Being in confined quarters for so long will cause some couples to realize that their marriages are not working, and they are ready to separate or divorce, thereby needing to both sell their current property and buy two smaller ones. Other families will realize that their current apartments are too small for their family’s needs, and will want to upgrade to larger properties. These scenarios will create more demand in the local real estate market, and both new construction and second-hand properties will be sought after.
In dealing with the isolation challenge and the ongoing need for social distancing in the “new reality” following this crisis, buyers and sellers will be turning to technology to find apartments. Viewing tours using virtual reality and zoom meetings for negotiations will become the norm in the real estate industry. Real Estate companies that are able to integrate technology in order to service clients in the “post Corona” era will have a distinct advantage to help both buyers and sellers through the process. By combining the most advanced technological tools, other aspects of the process as well, such as mortgage financing and negotiating contracts with the lawyers, will be able to guide buyers and sellers, avoiding physical interaction as much as possible.
This new era may feel like a science fiction novel but dealing with the new circumstances has pushed many industries, including the real estate industry, to develop creative and advanced solutions at warp speed. Buying and selling apartments is a fundamental need in our society and has been since the dawn of time. The real estate industry will survive the crisis, and new technology will help keep both buyers and sellers stay safe throughout the process.
Alyssa Friedland is a real estate agent with RE/MAX Vision in Jerusalem and specializes in the luxury and high-end market. She has been in the real estate business in Jerusalem for over 20 years and is available for free consultations regarding both buying and selling homes. She can be reached at 054-668-4111 or email@example.com