Uncertainty in the markets will lead to forced sales of real estate, says Dr. Nicole Lux, Senior Researcher at Bayes Business School and lead author of the Bayes Commercial Real Estate Loans Semi-Annual Report.
Dr. Nicole Lux, Senior Researcher at Bayes Business School
© Bayes Business School
The UK Chancellor of the Exchequer mini-budget has rocked the markets. The pound has tumbled and interest rates are set to rise as the Bank of England tries to react.
Among the most affected markets is the real estate one, where the main lenders are already withdrawing their mortgage offers in a cloud of uncertainty about financing costs. According to Dr Nicole Lux, a senior researcher at Bayes Business School and lead author of Bayes’ semi-annual report on commercial real estate loans, she says unpredictability could lead to forced real estate sales.
Fixed-rate mortgage products have been withdrawn
Dr Lux explained: “Rapidly changing interest rates make it difficult for lenders to assess the potential risk of falling home values or even the difficulty their borrowers may encounter in making payments. Fixed-rate mortgage products have been withdrawn because lenders don’t know how to get a five, ten or … even 25 year mortgage in the future. While recent government announcements have caused some confusion in the short term, it seems fairly certain that the low rates long-term interest rates from the past will not persist over the medium term and borrowers who bought between 2017 and 2017 Those who bought a property with a five-year fixed-rate mortgage in 2019 will end up spending more than their household income on the costs of mutual.
Stress tests are the order of the day
Government bond markets have already reacted to rising interest rates with a sharp decline in new issues, while private residential and commercial mortgage providers have been busy conducting stress tests to see if they would need capital. to cover the risks in their loan books.
The five-year Sonia swap rate, Lux said, shows that the affordability of debt is already falling sharply, which means fewer and fewer people are able to make repayments. At current interest rates, a 60 percent LTV (Loan to Value) mortgage requires more interest payments than disposable income. All of this will inevitably lead to forced sales among commercial and residential property owners, which will play heavily in the hands of well-funded investors who might get a deal. (kb)
