The 1985-94 Global Real Estate Cycle: Its Causes and Consequences

Abstract

The peak of the first global real estate boom was reached around 1990 in most Organization for Economic Cooperation and Development (OECD) countries. Asset inflation was massive: in office markets across Europe, capital values rose 400 percent between 1980 and 1990, accelerating after 1986 - while average consumer price inflation went up only 150 percent. Property values have declined sharply since 1990, with most property markets losing at least 20 percent in nominal terms the first year of the crash's onset. Cumulative drops in capital value often reached 50 percent by the end of 1993. This pattern of a sustained buildup, usually peaking in 1990, followed by a sharp fall in nominal values, has been encountered in most OECD markets and in several NIE countries. Real estate booms and busts are recurring events, says the author, but real estate volatility on the scale and with the intensity just experience is costly and destructive. Real resources are misallocated, and the impact on the banking system, on households, and on the economy can be lasting. The author surveys the global real estate cycle of 1985-94, trying to identify domestic and international factors that triggered this new phenomenon of global real estate volatility. The authors intent: Assuming that the globalization of financial markets is irreversible, can we separate unique factors from recurring ones in this first global cycle? Can we map generic policy lessons and identify policy priorities and research agendas? Can we identify factors that accentuate real estate price and investment volatility? Four domestic factors lay behind the unusual volatility of this first global cycle, says the author: the liberalization and deregulation of capital markets, a distorted incentive structure that often stimulated the use of debt, new macroeconomic tools and occasional policy errors, and the structure of the real estate sector itself. The wide-ranging survey includes a proposal for research in certain areas, and offers some diagnosis. For example: If the global real estate crash has publicized one thing, it is the poor quality of information on real estate markets.