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Black Swan Events and Property Prices

Peter Hemple looks at how unpredictable global events affect property investments

In the investment world, ‘black swans’ are world-changing events that are rare and difficult to predict, but which have serious implications for your investments. Nassim Taleb made the term famous in his 2007 book, The Black Swan, which forced many risk managers to think more deeply about the impact of improbable events. The release of the book was very well-timed as there is little doubt that just a year later, the 2008 Global Financial Crisis (GFC) was indeed a ‘black swan event’.

However, that does not mean that some people did not see it coming. Hedge fund manager John Paulson became famous during the credit crisis for a spectacular bet against the US housing market. Paulson’s fund was managing around $100m shortly before the GFC when he noticed major cracks in the sub-prime market. He managed to persuade several banks to sell him substantial sums of Credit Default Swaps, which are basically insurance contracts on mortgage debt.

Then he waited for the sub-prime crisis to unravel and the value of these insurance contracts soared. On some days the fund was making over a billion dollars a day. By the end of 2007, Paulson & Co (his hedge fund) had made $15bn. As markets continued to collapse in 2008, the fund made another $5bn and estimates put his own personal profits at $4bn during the two-year period.

Grey swans
Due to its vague definition, the financial world will forever debate whether historical shocks to the financial sector were black swans or not. It is obviously a grey area. Derived from the black swan theory (an event that is very unlikely and the timing is unknown), a ‘grey swan’ is an event that is known and could possibly happen, but which is assumed to be unlikely to occur.

Grey swans include the result of the EU referendum, the election of Donald Trump, and the Russian ‘re-invasion’ of Ukraine in 2022. Whether COVID-19 was a black or a grey swan is debatable. While many epidemiologists had been warning of a potential coronavirus outbreak for years, hardly anyone could have foreseen so many different countries going into lockdown at the same time.

In this article we will focus on the two most recent global ‘swan events’ that have sent property markets around the world on very different trajectories – the pandemic and the war in Ukraine. Some property markets have benefited considerably from the pandemic and some are also currently benefiting from the war in Ukraine. But will these trends last or will they go into reverse?

While these events are obviously out of our control, investors can make calculated predictions regarding how likely it is that these black and grey swan events will happen, and if they do happen how it would impact their portfolio. Also, when they happen there is often enough time to find a way of financially benefitting through property investment, or at the very least reducing your losses, if you react quickly enough. 

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