Faced with a broader impact and a more uncertain route to recovery, can the central bank pull off the same cure as 2008?
The coronavirus pandemic has swept across the world and led to movement restrictions and social distancing measures. Beyond the immediate concerns of flattening the curve of infections and death and finding antidotes and vaccines. People are concerned about their impact on the financial system. Whether its impact on the world economy will lead to a systemic financial crisis as in 2008.
Indeed, there are similarities between the two: massive losses, high unemployment rate, widespread bankruptcies, liquidity shortages. And it is still premature to draw strong inferences on how deep the virus's impact on the economy will become. However, it's crucial to compare the fundamental cause of the two events to better understand how the current pandemic may develop and affect different sectors of the global economy in both the short and long term.
The global financial crisis of 2008 was triggered by overstretched homeowners, speculative property developers, and loose lenders together in the subprime mortgage market in the United States, which then spread to financial systems worldwide thus led to a global financial crisis. It is a structural recession resulted from years of deeply rooted problems in the system. Whereas COVID-19, according to the World Economic Forum, is purely exogenous, it "arrives to the financial system like an asteroid might hit earth – it comes as a surprise, there is nothing we do to precipitate its arrival, and it can cause enormous damage." The economic downturn driven by coronavirus is not a result of the accumulation of structural problems but an exogenous event-driven downturn. According to Goldman Sachs’ research on bear markets going back since 1835, event-based crises like coronavirus recover significantly faster than structural and cyclical ones, especially as we can already see the market restarting in China as the curve flattening since the beginning of March.
The 2008 financial crisis was resolved by governments pumping billions into the banks and financial institutions to restore to pre-crash normality, at great public cost. Today banks with higher capital reserves and tighter regulations are standing on more solid grounds than they were in 2008. The banking sector is supporting and boosting economies by providing liquidity to and stimulating market activities in the economy. On March 19, the European Central Bank announced a new Pandemic Emergency Purchase Programme of €750 billion, in addition to the €120 billion announced 7 days ago, which in total amounts to 7.3% of euro area GDP. In the same week, the Fed announced its fourth round of quantitative easing by cutting the benchmark interest rate to zero and purchasing $700 billion worth of Treasury and mortgage-backed securities. However, it remains uncertain when will these measures that have brought economies to a standstill be loosened again.
Undeniably, real estate finds itself at the center of the storm once again. The coronavirus pandemic is different from the 2008 crisis because the spectrum of impact is much broader in terms of both business sectors and geographic locations. In the real estate sector, since the beginning of the pandemic, hospitality and retail are the two sectors that are affected the most. According to data released by hospitality analytics company STR, reported by CNN, "Only 21.6% of hotel rooms in the United States were occupied between March 29 and April 4, … a 68% decrease when compared to the same week last year. Oahu Island, Hawaii is one of the most impacted by the lack of hotel guests. Only 7% of hotel rooms are occupied, the lowest rate for any market in the country. That figure is down more than 90% from the same week last year." However, most anticipate a strong bounce-back in tourism and retail markets. If we consider the impact on hospitality and retail sectors as short term, the office sector, on the other hand, might be facing a long term structural change in the working ecosystem as a result of the global work-from-home experiment forced by the coronavirus. Logistics is perhaps one of the least affected sectors, with e-commerce retailers and logistics companies remain resilient in the face of increased demand for fresh food, medical supplies and the delivery of online purchases.
Yet the coronavirus crisis is also providing unprecedented opportunities in the real estate market. With U.S interest rates falling to historic lows, it presents a potential opportunity for mortgages and refinances lenders. We have also seen investors investing in distressed real estate properties or making acquisitions in the tourism and retail sectors at below market price. Unlike the 2008 crisis where the real estate sector is the cause of the crisis, in today's downturn, the real estate sector is slower moving and remains a lagging sector in the economy. It's hard to predict how coronavirus will continue to impact the real estate market in the future, but we can take certain measures to remain resilient and plan ahead for when normality eventually returns.