For the time being, though, this remains a cherished dream. In reality, there is a long way to go and it is very unclear exactly what the world will look like when we do emerge blinking into the light from our coronavirus lockdown. We have all undertaken a long and arduous journey through a strange new world, and are hoping we have found the wizard who will get us back to normality. But there’s a real risk we might not like what we find when we pull back the curtain and are faced with the stark truth that there is no normal to go back to.
The property market has taken a huge hit over the last few months. Official data released by HMRC showed that the volume of transactions was cut in half when the restrictions on movement were introduced. Although the great return to work was heralded in May, it has taken time for all the processes to adapt to the new world in which we find ourselves. For example, physical valuations have resumed but with stringent safety procedures in place that inevitably slow down the process.
Meanwhile, the impact on the wider economy has been so profound that the Government has seen fit to instruct lenders to introduce mortgage payment holidays for homeowners whose income has been affected by Covid-19. While these were initially for three months, the deadline has been extended and the numbers continue to rise daily. Similarly, all possession activity has been frozen so even where there have been longstanding issues and sizeable arrears predating the coronavirus outbreak, lenders are unable to take any action until the start of November. With the moratorium on litigation and other related action commencing at the start of December this leads us into 2021.
In the buy-to-let market, some portfolio landlords are seeing large numbers of tenants defaulting on rent. In these instances, even a mortgage payment holiday may be insufficient as the margins between income and outgoings across the portfolio are often a major source of income. Again, the freeze on evictions leaves them powerless to act, even where there is little prospect that tenants will be able to make good on the arrears in a distant post-coronavirus future.
The landscape looks equally uncertain for commercial landlords. There were sizeable shortfalls in rental payments in Q1 as the lockdown coincided with the quarterly rent payment due date, and this is hardly likely to have improved in Q2 as the full impact of Covid-19 has hit home on businesses the length and breadth of the country. Many retail and leisure premises continue to stand empty, and even once ‘non-essential’ retail is allowed to reopen, many shops will struggle to do so. With the economy seemingly set for a prolonged downturn, there will be strong downward pressure on rents and requests for rent-free periods.
Meanwhile, what was once prime commercial office space now lies abandoned, with the previous occupants all working remotely. It’s not yet clear how many will return once the lockdown is lifted. It seems likely that many firms will look to economise on what is for most a significant cost, while employees themselves, having discovered the advantages of home-working, will be reluctant to return to a five-days-a-week commuter lifestyle.
This is not a rosy picture, and the longer the crisis continues, the worse it will get. On one level it obviously makes sense to extend mortgage payment holidays, for example, but eventually that will have to end. When it does, people who have taken advantage of these may well find that while it has bought them a temporary reprieve, all it has done is to kick the can down the road, and given them an even bigger headache when the payment holiday ends. For lenders, there is the prospect of a wall of arrears that, like the Great Wall of China, will be visible from space.
It’s not easy to see the exit strategy from this, and at the moment lenders have more immediate concerns on their plate. With the first tranche of mortgage payment holidays coming up for expiry in June, they face a logistical nightmare making contact with all those borrowers, establishing the full financial circumstances and also what the best option is for the borrower.
Let’s say as a lender you have 10,000 customers currently on payment holidays that are due to expire within the next few weeks. That’s 10,000 conversations needed, each potentially lasting up to an hour. Leaving aside that it may take time to make contact or establish a process to allocate telephone appointments – many borrowers may be assuming that their payment holiday will somehow be automatically rolled over – it would require significant resource with the appropriate skill-set just to help these customers, on top of processing new applications coming in and dealing with all the ‘business as usual’ requirements such as inbound calls.
Given the need to ensure those staff are fully trained to deal with the situation, and to allow for any further back-office processes, the scale of the logistical problem starts to become clear. In the fullness of time, these conversations will need to take place across the industry with all of the nearly 2 million households that have so far applied for payment holidays, and this number is rising all the time. We may be past the peak of the virus itself but we are very far from reaching the peak (or maybe trough is more apt) of the economic impact.
Lenders also face a liquidity issue with so many loans not generating revenue. While banks have less of a problem because of their ability to access retail deposits, for many non-bank lenders this is a serious issue. Government and regulators have not articulated clearly what support may be available for these lenders so that they are able to play a full part in helping borrowers deal with the current crisis.
Nonetheless, these problems are potentially dwarfed by the tsunami of arrears that looks likely to hit the industry once payment holidays end. It’s all well and good that borrowers’ credit history won’t be adversely affected by taking payment holidays, but the interest on their loans isn’t going to disappear magically.
Among those currently taking payment holidays are people who have already lost their jobs, and many on furlough who will find that even with the easing of restrictions there is no job for them to go back to afterwards. Even those who are seamlessly absorbed back into the workforce will have sustained a financial blow during the ‘lockdown’ period and their income may not immediately recover to its previous level.
When they are required to start making payments again, they will not be in any better a position to service their loans, and in many cases will be substantially worse off, as well as facing higher repayments due to the accumulation of interest.
In these circumstances there is every reason to suppose that the arrears will rapidly mount up. If the downturn is as pronounced and prolonged as many economists fear, those who have taken an immediate hit to their finances could be joined by others, who have not yet been adversely affected but who will struggle as the economy falters over the coming months and years.
This is obviously a problem for homeowners themselves but compassion for the situation in which they will find themselves – through no fault of their own – cannot mask the equally obvious fact that lenders, too, will be placed in an extremely difficult position when this happens.
It is less apparent that there has been any serious thought from government or regulators as to how this situation can best be resolved. It is entirely understandable that the initial priority was to focus on measures that would help to keep the economy afloat, and to protect people as far as possible from immediate harm, whether to their health or to their livelihoods. As we approach the end of the first mortgage holiday period, however, it is no longer satisfactory to continue to leave this question unanswered.
There are certainly many things lenders can do to help themselves – and for the most part the industry is stepping up to the mark. Even before the Government introduced payment holidays, a number of lenders had already put in place measures to help borrowers. Above all, they are engaging with their borrowers, and as far as possible preparing the ground for when those holiday periods do come to an end – although the sheer number of borrowers involved makes this a daunting task.
The scale of the crisis, and the size of the problem being stored up, means that there will need to be strong action from government to ensure that it does not turn into a downward spiral for the property market as a whole. We have seen in recent weeks reassuring signs that the Government understands the importance of the property sector as a key driver of the economy as a whole, with steps taken to get the construction industry, valuers and estate agents back to work. They will need to demonstrate ongoing resolve to ensure this is followed up as the immediate crisis unwinds. Without concerted action, we risk stumbling from a public health emergency into an economic catastrophe.
Ultimately, if that happens, the price will be paid by the very people the Government is trying to protect. No doubt we would all like to see continued forbearance in as many cases as possible, to allow people impacted by Covid-19 more time to get back on their feet. But even the most resilient lenders – and their investors and shareholders – cannot be expected to bear this burden indefinitely.
And the longer payment holidays are extended, the bigger the problem. If borrowers are not going to be in a position to resume repayments, or agree a new schedule with their lenders, then their situation will ultimately have deteriorated in the intervening period. It is likely that most of these borrowers will be pro-active and look to help themselves by looking at property sale, downsizing or other options to improve their situation. Maybe a consideration to help these customers could be to waive Early Repayment Charges if they are due, as when these were committed to nobody could foresee what we are now faced with.
There needs to be a concerted effort, with lenders working closely with government and regulators, to come up with an action plan to how to handle this situation. There is a parallel here with the sort of ongoing communication effort that has gone into contacting people with interest-only mortgages due to expire. But the impact of that issue is smaller and is spread out over a number of years. With a much larger number of mortgage holidays, all set to expire within a much shorter timeframe, the task is a much more difficult and more urgent one.
David Miller is client account manager, Spicerhaart Corporate Sales
