Now vs. the GFC

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Comparisons between the turmoil in January and February versus the GFC in 2009 yield a number of observations.

On the encouraging side:
  • Stronger consumer. Consumer balance sheets are much stronger than they were leading up to the GFC. Lending standards have been higher and home mortgage LTVs are lower. Underwater households have, by now, mostly defaulted or deleveraged.
  • Wider cap rate spreads. In nearly all markets/sectors, the spread between cap rates and bond yields is higher (sometimes significantly) than it was going in to the GFC.
  • Less CRE supply. The level of new real estate supply under construction is far lower than it was going into the GFC. And vacancy rates for many locations/property types are lower. As such, there is less risk of a supply overhang.
  • Lower leverage. The degree of leverage employed by real estate investors is significantly lower than it was before the GFC. For example, the aggregate level of CRE leverage in the UK is actually still declining.
  • Higher standards. Typical underwriting rigor and due diligence standards are stronger than prior to the GFC.
  • More transparent. Complex debt and securitization structures are uncommon today whereas they were widespread before the GFC. There is therefore more transparency in assessing underlying economic risks and linkages.
  • Less-advanced occupier recovery. In many real estate markets/sectors, the occupier market recovery is less advanced than it was going into the GFC. For example, continental European office rents are still not much higher than their cyclical lows. There is less room for rents to fall than in markets that are near peaks. This is not the case in the US broadly (apartment rents exceed pre-recession highs), but recovery is still underway in other sectors.
  • Banks stronger. Bank capital is broadly stronger and more transparent today than going into the GFC. Although low and negative rates challenge bank profitability, there is much less concern about viability.
Less favorable observations include the following:
  • Fewer traditional tools for central banks. Central banks are now closer to or beyond the “zero bound” of interest rates and have already expanded their balance sheets dramatically. As such, they are low on conventional monetary policy ammunition to fight a recession.
  • More complex impact of falling oil prices. The impact of lower energy prices on developed world growth is now more ambiguous given that the US has become a large producer. This reduces the self-stabilizing effect of lower energy prices as they have both a positive and a negative impact on US growth.
  • Less political cohesion, more populism. Signs of popular discontent are now widespread and populist political groupings are in the ascendant. It may be harder today to coordinate a policy response, both in the US and abroad, in the event of another crisis.
  • Geopolitics. The world today is facing a more complicated and risky geopolitical environment. Concerns include the rise of IS and a corresponding resurgence in Islamist terrorism, aggressive behavior from Russia and North Korea, and overlapping claims in the South China Sea. Of particular relevance to core European markets, conflict in the Middle East is causing potentially destabilizing flows of refugees into Europe.