Commentators, especially those who may not have experienced past real estate-related financial crises in regions ranging from the United States and Europe to Hong Kong and Latin America, cannot understand the significance of the accompanying systemic risks. Not yet.
Therefore, while China appears to be able to absorb the effects of the real estate crisis in terms of financial and fiscal resources, although it slows economic growth, the same cannot be said for the United States and some European countries.
The IMF notes that this decline was much steeper than in past monetary tightening cycles, wiping out all the gains of the past two years. This is an ominous development not just for commercial real estate, but for the U.S. financial sector and economy as a whole.
Rising borrowing costs always tend to lower the prices of commercial real estate, both directly by making it more expensive to invest in the sector and indirectly by slowing economic activity and reducing demand for such properties. happen. Nevertheless, the IMF notes that “the sharp decline in prices during the current US monetary tightening cycle is remarkable.”
The far-reaching implications of these developments are profound for economists, bankers, and financial analysts alike, and for investment institutions such as pension funds that treat commercial real estate as an alternative to stocks and bonds.
Hong Kong homeowners looking to sell are missing out on the opportunity to sell as the recession continues.
Hong Kong homeowners looking to sell are missing out on the opportunity to sell as the recession continues.
Trends in the real estate sector are (or should be) of great interest to journalists in their role as watchdogs of the public interest. Overreach or “bubbles” can creep in without even commentators or regulators noticing.
While many people are currently preoccupied with China’s housing crisis, they don’t seem to be paying much attention to developments in the commercial real estate market or, more dangerously, in the broader bond market. .
A decline in real estate valuations will be an important factor. As the IMF notes, commercial real estate prices have remained “generally stable” during past Fed rate hikes. The report notes that the difference in price trends between recent and past monetary policy tightening cycles may be partially explained by the “rapid pace of monetary policy tightening this time around,” and that this is due to “the rise in mortgage rates and commercial “This contributed to the rapid rise in mortgage-backed loans.” Securities Spread”.
Losses on commercial real estate loans have increased as a result of rising financing costs and falling real estate prices since the start of the tightening cycle. Available funds are being squeezed as U.S. banks adopt stricter lending standards.
Asia can only hope that the Fed judges the right time to cut interest rates.
Asia can only hope that the Fed judges the right time to cut interest rates.
All of this is compounded by trends such as remote work and e-commerce, which are reducing demand for office and retail buildings and increasing vacancy rates. There are concerns in these areas as prices are depressed, loan delinquency rates are rising, and mass refinances are looming.
Meanwhile, some housing markets in Europe are suffering from falling valuations due to rising interest rates. According to a survey of 25 of the world’s largest cities by Swiss bank UBS, real house prices will fall by an average of 5% from mid-2022 to mid-2023, and this trend is likely to continue.
The message to analysts, financial journalists, investors and policy makers is that real estate markets need to be closely monitored and are by no means China-only or China-centric.
Anthony Rowley is a veteran journalist specializing in economic and financial issues in Asia.