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Global Property Crash Stress Test Scenario

This report is one from a suite of scenario reports that can be used by businesses as a basis for testing against vulnerabilities and improving resilience. 

Overview

Stress tests are an effective tool for understanding cause and effect relationships and risk exposure across a spectrum of extreme shocks, such as those proposed in the Cambridge Taxonomy of Threats, encompassing five classes of business risk. This report is one from a suite of scenario reports that can be used by businesses as a basis for testing against vulnerabilities and improving resilience. 

The Global Property Crash Stress Test scenario report describes a property bubble that is triggered in the emerging boom markets of South East Asia and propagates across continents as investors and banks lose faith in global property markets. Following the housing market collapse in India and China the contagion spreads and affects both mortgage and non-mortgage asset prices in Asia Pacific, Scandinavia, Europe and beyond. 

Key findings

  • The economic impact causes a worldwide recession lasting from one year to eighteen months across the different scenario variants. 
  • The overall loss, expressed as lost global Gross Domestic Product (GDP) compared with the projected baseline economic output over a five-year period is estimated as being between $13.2 and $19.6 trillion, depending on the variant of the scenario. 
  • The financial portfolio impact includes recovery after three years in the first scenario variant, whereas recovery does not occur in the five-year modelling period of the second scenario variant. 
  • The maximum downturn experienced for the conservative portfolio in the first scenario variant is in Yr1Q4 with a decline of 15.4 per cent. 
  • The worst performing equities are UK stocks (FTSE-100), while the best performing equities are German stocks (DAX). 
  • The worst performing fixed income bonds are Japanese bonds while US bonds perform the best.
  • The worst performing portfolio structure is the aggressive portfolio with a decline of -22.5 per cent in the S1 variant.