Assessing risk in real estate requires new perspectives and shifting benchmarks
Risk is a fashion item. Like the music of Bob Dylan or Beethoven, it’s always there but has to be rediscovered by every generation. While a generation has a life cycle of perhaps 30 years, financial market risk tends towards shorter cycles — 10 to 15 years seems to be the norm.
Where do the real estate risks currently lie? The global stock market crash of October 1987, for the first time, assured “risk” a prominent place on the checklist of investors. Three reasons account for this:
First, the 1987 crash (confined to stock markets) came out of the blue. It illustrated how interconnected global markets had become. It was preceded by a long period of above-trend performance. Periods of financial stability seem to be a reliable precursor of market shocks, and the longer the period of stability, the bigger the subsequent shock.
Second, the 1987 crash coincided with emerging availability of desktop-computing power. Financial analysis migrated from the classro