Why banks like New York Community Bancorp and Japan’s Aozora are having fresh property pain

At least some is in America’s regional banks, where commercial property loans account for about 30 per cent of all loans, compared with 6.5 per cent at large US banks.

But Thursday’s news of big losses at Japan’s Aozora neatly makes Sternlicht’s point – we don’t really know where these loans are.

So, are NYCB and Aozora the first signs of a systemic commercial property credit event? Probably not, particularly if interest rates come down as expected and give borrowers and lenders breathing space.

But there are some flow-on effects to think about. Morgan Stanley strategist Mike Wilson says that even if banks holding this debt can cope with the losses, it crimps their ability to lend to other businesses.

But if there’s one broader lesson from the sudden re-emergence of commercial property fears, then it’s this: we still haven’t cleared out the excesses that built up in the era of very low interest rates, and were compounded during the pandemic period of extreme froth.

Fear rates will stay high

Macquarie strategist Viktor Shvets argues the market’s “investment clock” is broken. Previously, we had investing cycles that were “designed to clear excesses, enabling a new phase to gather steam”.

But Shvets says the world is now so indebted, and so financialised, that these cycles aren’t allowed to occur. With “households and corporates becoming hooked on leverage”, we can’t let bubbles pop because they’re “the essence of our economies”.

If that’s a bit deep, consider the last few years. While there has been some pain in commercial real estate and venture capital and profitless tech, the bad news out of NYCB and Aozora tells us that the excesses in these areas have not been cleared out by higher interest rates, and instead continue to linger.

This is why investors are cheering the prospect of rate cuts with such gusto. And it’s why the fear of higher-for-longer interest rates – which the Federal Reserve reminded the world of on Thursday by killing off hopes of a March cut – is still real.