The global financial meltdown of 2008 was triggered largely by overpriced residential property values. The US sub-prime mortgage market, large swathes of which had been bundled together or securitised in vehicles few outside the financial sector understood or kept a close eye on, was the first to blow.
The Irish property market, which had been bid up in value like the Dutch tulip, followed soon after, blowing a hole through the domestic banking sector and eventually through the sovereign via the infamous bank guarantee.
This time around, the weak link in the global financial chain is not residential but commercial. That’s not to say we’re going see anything like what happened in 2008 – banks aren’t tied into property (commercial or residential) in the same way – but there is increased speculation that “stretched valuations” in the commercial sector have been found out by higher interest rates. And there is also the structural challenge of fewer people working in offices.
“Amid the rapid tightening of monetary policy, global commercial real estate markets are particularly vulnerable due to concerns over stretched valuations and the increase in non-bank and international financing of the sector,” the Irish Central Bank noted in its latest Financial Stability Review.
“The sector is facing both cyclical headwinds, due to rising interest rates, as well as structural challenges, including the growth in home working affecting the office segment,” it said.
Commercial property companies borrowed heavily in recent years to fuel expansion and now face significantly higher refinancing costs.
According to commercial real estate specialist CBRE, demand for office space in Dublin slumped in the first quarter of this year on a back of a global slowdown in tech and as more employees opt for hybrid working conditions with the take-up of office space totalling 26,437 sq m, down 42 per cent quarter last year.
While residential markets are also vulnerable to higher interest rates after a long build-up in price appreciation and household leverage, the regulator seemed to dampen concern about a crash or credit crunch here, noting the tick-up in arrears from the current cycle of rate hikes was still modest.