As the global economy regains momentum following the Great Financial Crisis, the World Economic Forum and JLL examine dynamics of real estate asset prices
CHICAGO AND DAVOS, JANUARY 23, 2015 – A range of
strategies is required to limit the economic and social impact that real
estate market cycles can cause. An in-depth study of real estate market
volatility conducted by JLL (NYSE: JLL) in association with the World Economic Forum describes the policy options and strategies that could manage and possibly limit this impact.
“Emerging
Horizons on Real Estate – An Industry Initiative on Asset Price
Dynamics” explains that real estate cycles are typically ignited by
shocks from outside the real estate sector such as financial
deregulation, changes in cross-border investment regulations or
political events. Once they occur, real estate markets often play a
prominent role in spreading them to other sectors of the economy
because:
- It is pervasive across all economic sectors, with especially strong linkages to the financial sector.
- Real estate ownership involves long-term financial commitments that can be costly to reverse.
- Residential real estate has a strong influence on household wealth and, therefore, retail spending and employment.
The
report notes that cyclicality is inherent in the real estate sector.
Demand for office, retail and industrial space can move rapidly, while
the construction of additional space is typically measured in years
rather than months. Therefore, a distinction must be drawn between the
natural cyclicality of the sector and extreme cycles that lead to
destruction of financial and social wealth.
“Our analysis shows
that the real estate sector has been involved in, but has not caused,
most financial market cycles over the past century,” said Colin Dyer,
CEO of JLL and Chair of the Steering Committee for the Asset Price
Dynamics project. “Understanding real estate’s role in these cycles
underscores the need for the financial and real estate sectors to work
together to lessen negative impacts of future asset price volatility.”
The
report highlights a range of policies that can have a marked impact on
the frequency and amplitude of real estate cycles. The report identifies
three broad categories of policy options:
- Monetary policy can
be adjusted to raise interest rates and slow the credit growth that
drives many market cycles. But monetary policy is often seen as a blunt
instrument that has impacts across all sectors of the economy. It can
sometimes conflict with other policy objectives such as strong economic
growth and rising employment.
- Macro-prudential policies such
as incrementally limiting credit growth during market upturns and
requiring banks to build up additional capital reserves as a buffer
against future market downturns are another option. These policies are
designed to track and manage the health, soundness and vulnerabilities
of the financial system as a whole, taking a broader view than a simple
focus on individual banks or finance houses.
- Micro-economic underpinnings
of markets can help moderate future market cycles. These can include
responsive urban planning regimes, flexible policies for dealing with
financially distressed assets and consumer protection laws that
discourage irresponsible lending by home mortgage providers. As noted by
Luci Ellis, Head of Financial Stability Department, Reserve Bank of
Australia in a foreword to the report, “national institutional details
matter.”
The report emphasises that while real estate
cycles can have economic and social costs, policies to limit them also
have costs. Raising interest rates to cool an impending real estate boom
can slow the entire economy, for example, leading to lower economic
growth and a decline in investment.
“Policy makers are challenged
to distinguish between benign cycles that are inevitable features of
real estate markets and events that can lead to wealth destruction and
economic dislocation,” said Dr David Rees, JLL Research Director and
author of the report. “Real estate cycles have costs as well as benefits
and policy options have benefits as well as costs. A better
understanding of these metrics would allow policy makers to respond more
appropriately to market cycles.”
“The Global Financial Crisis
demonstrated failure across many public and private sectors, and sent a
wake-up call to market regulators, banking and real estate," said Dyer.
“The real estate sector needs to be far more proactive in communicating
our case to bankers and regulators at the global, national and local
level. The recommendations of this research include an emphasis on
better market data, improved market analysis and increased communication
between the real estate and financial sectors.”
“Emerging
Horizons on Real Estate – An Industry Initiative on Asset Price
Dynamics,” is being presented at the World Economic Forum’s Annual
Meeting in Davos-Klosters in January 2015. JLL and the Forum drew on an
extensive body of research with input from an international panel of
expert academics, central bankers, market regulators and real estate
practitioners to examine the historical profile and causes of real
estate market cycles. It is available on the World Economic Forum website and the JLL website.
About the World Economic Forum
The
World Economic Forum is an international institution committed to
improving the state of the world through public-private cooperation in
the spirit of global citizenship. It engages with business, political,
academic and other leaders of society to shape global, regional and
industry agendas. Incorporated as a not-for-profit foundation in 1971
and headquartered in Geneva, Switzerland, the Forum is independent,
impartial and not tied to any interests. It cooperates closely with all
leading international organizations.
About JLL
JLL
(NYSE: JLL) is a professional services and investment management firm
offering specialized real estate services to clients seeking increased
value by owning, occupying and investing in real estate. With annual fee
revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more
than 200 corporate offices, operates in 75 countries and has a global
workforce of approximately 53,000. On behalf of its clients, the firm
provides management and real estate outsourcing services for a property
portfolio of 3.0 billion square feet, or 280.0 million square meters,
and completed $99.0 billion in sales, acquisitions and finance
transactions in 2013. Its investment management business, LaSalle
Investment Management, has $53.0 billion of real estate assets under
management. JLL is the brand name, and a registered trademark, of Jones
Lang LaSalle Incorporated. For further information, visit www.jll.com.
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