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The authors of this week's Bank of England Financial Stability Report must have felt somewhat disconnected from reality yesterday as they read a raft of headlines about how they were calling the bottom of the credit crunch and saying the worst was over.
Granted they did say that the falls in value of some asset-backed securities had been overdone, and that they expected these to be bought up and the markets gradually to unfreeze as the year progresses. But they also painted a pretty bleak picture of what could go wrong elsewhere.
High on their list of worries is commercial property - and with good reason. The last time we had a financial crisis like this, with massive de-gearing across the system, property funds, developers and investors were among the worst-affected. Most property funds collapsed as they could not cope with the flood of investors wanting their money back because they could not sell the buildings in which they had invested.
Banks financing property took truly massive hits, and many developers could not finish the buildings they had started. Some investors put the real decline in commercial property values at 30%, and it took almost a decade for the sector to recover. Indeed, it was only rehabilitated then by the determined effort of pension fund managers to give long-term support to the asset class. If they tried such co-ordinated support these days, the Financial Services Authority would probably try to toss them in jail, but it was certainly needed back then.
The risks to property today are pretty obvious. Count the cranes and see how many buildings are going up across the City and Docklands. Read the stories of financial houses shedding staff - I heard only yesterday that one of the big accountancy firms has just taken the axe to its corporate finance department because there are no public-company flotations, and there is little likelihood of them. Then put the two together. Companies that are getting rid of staff do not move to bigger buildings, even if they have in happier times taken options on some of the notyetcompleted space.
Think also how many of the City's extravagant new buildings of the current vintage are occupied by law firms and accountants. With the collapse of mergers and acquisitions activity, private-equity buyouts and structured finance, they are going to feel the pinch as fast as anyone.
All this means that rental incomes will stagnate or possibly fall. Huge discountsand rent-free holidays will be offered to persuade people to move into new space, but the stuff they have vacated then becomes a drag on the markets. Property values will therefore fall - but according to Capital Economics, they have outperformed equities and bonds on a risk-adjusted basis since 1970 so it is about time there was a correction.
The banks will not be immune to this. It is said that 35% of banks' non-financial lending is to the commercial property sector, which means they have a massive stake in the business, and some losses must be inevitable. So just because they may see light at the end of the subprime tunnel, don't dismiss the possibility that it could be a property crash coming in the other direction.
