Monetary policy has changed, “some would say brutally”, says Peter Praet, the European Central Bank’s former chief economist.
Rates were expected to remain very low for a long period of time. “Suddenly, in one year, you get an increase of more than 400 basis points which creates a lot of stress in some sectors,” he said, adding that real estate is “very exposed”.
However, Praet, who spoke to Real Asset Media during the recent EPRA conference, confesses surprised that things were not much worse for property. “One of my biggest surprise – and it’s a more positive surprise – I thought the stress would be much bigger than we see today.”
Property’s problems have been relatively contained and Praet puts this down to the sector being better organised than it used to be and because of the reduction in leverage that followed the GFC.
Nevertheless, he said the period of low interest rates inflated asset prices, “so it’s going to make pain.”
“The question is, ‘how long?’”
He expects the downturn to last about two years. “That may look long, but from a business cycle point of view, it’s not that long.”