Developing a model of property market resilience in the wake of the 2008 economic crisis Dr Gheorghe Multescu Director London Institute for Real Estate London South Bank University Dr Ala Daugeliene Associate Professor Kaunas University of Technology
Agenda 1. Research Rationale 2. Research Objectives 3. Methodology & Data Sources 4. Data Analysis 5. Findings & Implications
Research Rationale Definition of resilience, economic resilience and property market resilience Measuring resilience based on economic / property market cycles, market performance, economic vulnerabilities and adaptive change factors Establishing a resilience model applicable to CEE emergent property markets and building an index of property market resilience
Research Questions How can emergent property markets become more resilient and what are the lessons to be learnt from developed property markets in order to enhance their adaptive capacity of reaction to economic disasters?
Research Objectives 1. To define the concept of resilience in property markets 2. To define a model for the assessment of property market resilience to economic disasters based on vulnerability and adaptive capacity criteria 3. To measure and implement lessons learnt from managing the property market resilience of an established European capital city to an emergent CEE capital city real estate market
Methodology Mixed method approach: Secondary data survey modelling economic and market resilience Primary qualitative data: Semi-structured survey questionnaires with property market stakeholders (policy makers, finance sector, investors and developers) operating in the CoL and selected CEE markets Quantitative data sets concerning: Price / returns & values index (IPD MSCI Annual and Quarterly Property Index data for developed and emergent CEE markets) CoL market cycle movements (IPD s UK annual / quarterly digest 2009-2014)
Resilience Theory Gheorghe Multescu & Ala Daugeliene
Resilience Theory Resilience is the capacity of a system to continually change and adapt yet remain within critical thresholds. Static and dynamic resilience defined by existent research Static economic resilience is the ability or capacity of a system to absorb or cushion against damage or loss (Holling, 1973; Perrings, 2001) Dynamic economic resilience is the ability of a system to recover from a severe economic shock (Rose, 2009)
Inherent or adaptive market resilience? Inherent ability to change under normal circumstances (e.g. the ability of markets to reallocate resources in response to price signals). Adaptive ability to adapt in crisis situations due to ingenuity or extra effort (e.g. strengthening the market by providing information to match suppliers without customers to customers without suppliers).
Economic resilience model Microeconomic (individual business or household) Mesoeconomic (individual industry or market) Macroeconomic (combination of all economic entities)
Economic resilience model Source: Rose (2009)
Market Resilience to 2008 global financial crisis (GFC)? Economic crisis, disaster, downturn, recession, depression, slump Can be defined as a long-term economic state characterized by unemployment, low prices and low levels of trade and investment Sudden downturn brought on by a financial crisis Period of dismal economic performance Direct and indirect effect on property markets different effects and levels of resilience in developed and emergent property markets
Property Market Cycle Theory
Property Market Cycle Theory
Index of Resilient Cities Measuring vulnerabilities and capacity of adaptive change of global cities Dimensions of vulnerability consist of climate, environment, resources, infrastructure, community Adaptive capacity refers to governance, institutions, technical and learning process, planning systems and funding structures What are the vulnerability factors of an economic crisis and property market downturn and what adaptive capacity measures could enhance resilience?
Key issues in measuring economic resilience
Vulnerabilities and adaptive change in CEE regional economies and property markets
Inherent Property Market Resilience Inherent property market resilience: Capacity of market to correct itself in order to cushion / minimise losses price / return changes measured through price / return index of property market resilience
Adaptive / Mitigated Property Market Resilience Adaptive property market resilience: Sum of adaptive measures (mitigated) actively implemented in the market in order to minimise vulnerabilities and enable reallocation of resources with a positive impact on demand / supply ration and price / returns index
Qualitative Survey Findings Correlation between property market resilience and vulnerabilities / adaptive change measures in the structure of CEE emergent markets Building a resilience index based on measuring the effect of shock absorption or shock counteraction policies across CEE countries. A set of variables influence resilience in the following areas: macroeconomic stability; microeconomic market efficiency; good governance; social development.
Preliminary Findings External and domestic shocks (vulnerabilities) have an effect on the CEE property market growth (expansions) External vulnerabilities with an effect on property cycle downturns can include: sudden stops in capital flows, advanced economy recessions, spikes in global uncertainty, terms-of-trade busts Domestic vulnerabilities include: lack of financial regulation leading to credit booms and price bubbles banking crises banking privatisation policies leading to finance shortages and from domestic markets, Lack of transparency and market transaction data Both external and domestic vulnerabilities increasing the probability that growth will shift into a downturn
Preliminary Findings Macro and micro economic policies are associated with increased property market resilience: greater policy space (as measured by low inflation and favourable fiscal and external positions) improved policy frameworks (as measured by countercyclical fiscal policy, inflation targeting, and flexible exchange rate regimes) Good governance deregulation and strengthening of local administration Social development collaborative policies and growth of middle class has a direct impact on recovery and increased demand in property market (labour market, local economy)
Property market capacity of adaptive changes Mitigation measures: Implementation of Knowledge-city concept and transfer and innovation technology leading to diversified sectorial portfolio investment Availability of market data and transparent transaction records Strengthening of local economy Strong financial sector / access to finance (local and global capital) Attractiveness to regional and global investors
Quantitative analysis Measuring resilience based on property price / returns index regression analysis Computable General Equilibrium (CGE) analysis model of property cycles
Implications & Further Research Resilience of property markets is strongly linked to local economic policies, market liquidity and access to global capital Property market resilience depends less on high volatility (price / value spikes) and depends more on positive price / value index and long-term return Further research required to correlate adaptive change policy measures with emergent market property cycles
THANK YOU QUESTIONS? gheorghe.multescu@lsbu.ac.uk