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News release

Chicago and Davos

Victim or Villain?  Real Estate’s Role in Market Cycles

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 28, 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.​