Quo vadis terra firma?
In the midst of a political, military and civil war, the Russo-Ukrainian conflict has proven to be much more than just a regional matter. Indeed, in today’s modern and globalized world, it is of importance to understand how the world is economically interconnected and what the impacts of such a crisis; and more specifically what the economic and financial consequences are. As past conflicts have revealed, they raise a few questions: What happens to the real estate prices? What does it mean for commodity markets? What happened in the past during similar circumstances and what is then expected for the future?
Global Real Estate Prices over 150 years including two major world wars
Source: Knoll, K., Schularick, M. & Steger, T. (2017). No Price Like Home: Global House Prices, 1870-2012. American Economic Review, 107(2), 20.
Countries included: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom and the United States.
Taking the two most devastating and statistically relevant conflicts over the last 100 years as a bogie, the two world wars seem to show that there seems to be a direct correlation between wars and the price of real estate in all major Western countries around the globe, including Switzerland: as soon as the first shots were being fired the price of real estate consequently went down as long as the conflict lasted. However, as soon as the conflicts were over we can clearly see an increase in real estate prices back to old before war levels. Sadly confirming that after a war, the restructuring and investment opportunities in real estate go up again drastically.
Were those price changes purely caused by classic economic drivers (i.e. inflation, interest rate) or also by behavioral economic realities (i.e.fear, uncertainty)?
Classic economic drivers: Inflation and interest rates
Even before the conflict in Eastern Europe, inflation wiggled its ugly head during and post Corona crisis: logistic delivery chains have been severely disrupted, construction material like wood, cement, and steel went through the roof in 2020 to early 2022. Coupled with inflation, the Russian invasion has triggered a severe energy war which consequently has substantially raised the price of oil, gas and raw material need for the virtual IT world as well as the car industry .
Nevertheless the Swiss National Bank just stated last week-again-that these are “temporary” phenomena and that inflation will “calm” later in the year. Yet we see the long end of the Swiss ten year Government Bond passing the .53% mark going slowly but steadily up (NB: from -1.08% in August of 2019).
But is not real estate supposed to be the best hedge against inflation? Yes indeed: major drivers of real estate investments are their rental income-paired with capital appreciation- on a total return basis. Particularly former is inflation resistant as rents in office buildings, retail and living quarters are typically linked to an inflation index. That means rents adjust to higher prices and thereby keep their desired monetary value over time. And the sensitive common charges (i.e.heating) are passed on to the tenant.
As to interest rate changes, the Western central banks have adopted a minimum upper range since the various financial crisis that must be met in order to be granted a retail mortgage as individual investor. In the case of Switzerland, that is a +5% spread over any current mortgage rate that needs to be met by applicants in order to be granted a mortgage. Goal there is to stabilize the housing markets and to prevent overheating and disastrous real estate price collapses as in the USA in 2008.
Behavioral economic realities: The psychological effect
Crisis cause uncertainty, regardless if a Covid pandemic or a war in Europe. Overall, buyers from all price ranges will be concerned as uncertainty usually prevent consumers from purchasing larger tickets, such as cars or homes. They might also reconsider their purchases as a direct consequence of the dramatic increase in the price of oil and gas, which could be shortening their budget.
In times of war and crisis, we believe that consumer behavior generally tends to be oriented towards restraint. However the early discovery of vaccines during Corona, caused the demand for home purchases to explode in the Western world. As Gordon Gekko, played by Michael Douglas, said in the 1987 movie “Wall Street”: “…Greed is good!”
Once uncertainty switches to fear, however, logic typically does not prevail, decisions and moods are based on panicky emotions rather than rational thinking. During these situations instincts take over and no economic long term decisions will or better should be made. Statistically, however, as illustrated in the graph above, once fear subsides, economic decisions are made on rationale, and prices rebound and stabilize again.
Capital and Commodities Market
Gas and oil
It has definitely not gone unnoticed that the price of gas has skyrocketed for these past few weeks and remains today one of the key global repercussions of the crisis. It does correlate with the past major global events as in these types of circumstances, investors tend to invest in these ‘safe haven’ stocks such as crude oil, gas and gold.
Given that Russia and Ukraine are major exporters of crude oil and gas, they have great power to influence the market, hence its current reaction. The price of oil rose above 115 dollars per barrel, a first since 2008.
Russia is also the largest exporter of palladium and wheat in the world which has pushed the prices together with other various metals to rise sharply since the beginning of the invasion.
Currencies such as Swiss Franc and the US Dollar have seen the Euro take a beating, which is usually the case during major global crisis. These currency investments are seen by investors as being a “safe heaven “and tactical moves to adopt during important events around the globe, it is called hedging against political and event risk.
The fact that Russia has been sanctioned and excluded from the international currency markets puts additional pressure on these markets, and will cause Russia to either print more Rubels creating domestic hyper inflation, or to pressure the West to pay their oil and gas imports from Russia in Rubel. Both not desirable scenarios in the long term.
Volatility has been quite high, overpassing 30 on the VIX index, even though it was already expected to rise due to inflation and as a natural continuity in a business cycle. In general and as a reference, latility is considered as high when situated above 20. However, at the beginning of the Covid-19 pandemic it went close up to 66, which is considerably higher than the current situation, as investors and people in general have not consider the Ukrainian invasion as such a global event compared to the pandemic.
But a rising volatility, even if at first glance is synonymous with insecurity, should not be seen as harmful but rather as an opportunity for investors. It is relevant to favor long term businesses with a strong pricing power. Indeed, looking back at historical geopolitical shocks, stock markets did take less than 2 months to recover, and a little bit more for larger conflicts.
 Bandhu Majumder, S. (2021). Searching for hedging and safe haven assets for Indian equity market – a comparison between gold, cryptocurrency and commodities. Indian Growth and Development Review. 15(1), 60-84.
 Baur, D.G. & McDermott, T.K. (2010). Is gold a safe haven ? International evidence. Journal of Banking and Finance. 34(8), 1886-1898.
- As to real estate prices, wars and conflicts on a global scale do affect prices negatively. However a rebound to pre war levels has been seen on a global scale after the conflict subsides.
- Inflation is upon us, yet commercially used properties should fare well as rent incomes are linked to a inflation index thereby maintaining the purchasing power of income.
- Commodities prices have gone through the roof already before the Russian/Ukrainian crisis and will maintain to be a reality going forward given that the supply over them is controlled by only a handful of countries ruled by sometimes questionable governments, and the ever growing global demand to satisfy our thirst for a virtual world, alternative vehicles requiring such commodities and IT driven devices ruling over our daily lives.
Fear nor greed are good!
Dr Peter Moertl
Lucile Athia, MSc
Premier Suisse Estates LLC
March 28, 2022
 Bandhu Majumder, S. (2021). Searching for hedging and safe haven assets for Indian equity market – a comparison between gold, cryptocurrency and commodities. Indian Growth and Development Review. 15(1), 60-84.  Baur, D.G. & McDermott, T.K. (2010). Is gold a safe haven ? International evidence. Journal of Banking and Finance. 34(8), 1886-1898.