Cycles, Trends, Disruptions: Real Estate Centrality on the Global Financial Crisis, COVID-19 Pandemic, and New Techno-Economic Paradigm

Abstract

Real estate plays a pivotal role in the contemporary world, accounting for over half of global wealth and significant employment and GDP shares. This essay examines three key events—the 2007–2008 Global Financial Crisis (GFC), the COVID-19 pandemic, and recent technological revolutions—to place real estate’s centrality. By analyzing housing price indexes in major economies, the paper identifies global trends and regional nuances, as well as highlights real estate’s dual role as both a reflection and a driver of economic cycles. Then, I explore in detail the GFC, the urban roots of COVID-19 and its effects on real estate markets, and the relationship between new techno-economic paradigms and cities and real estate. Future research directions on real estate are also pointed out.

1. Introduction

Real estate is at the center of contemporary life. This essay focuses on three of these events—the 2007–2008 Global Financial Crisis (GFC) triggered by the U.S. mortgage bubble, the COVID-19 pandemic and its urban roots, and the penetration of news techno-economic paradigms into our urban daily lives—to illuminate and unravel the centrality of real estate in our societies.

The land, construction, and real estate sectors correspond to more than half of the global wealth, and the real estate sector alone provides 5 to 10% of employment and generates 5 to 15% of the GDP in developed countries. At the same time, the environmental impact caused by real estate goods represents about 30% of polluting emissions and 40% of energy consumption globally [1].

The first two decades of the 21st century saw massive growth in real estate prices across the globe, particularly in emerging or BRICS countries (Brazil, Russia, India, China, and South Africa). Figure 1 depicts this cycle through housing price indexes – CPI deflated values from 2007’s second quarter to 2024’s first quarter—for the world’s three largest economies (US, Euro Zone, China) plus India (fifth largest) and Brazil (seventh largest). It shows a global trend in real estate price uplifts and how it was more pronounced in Brazil and India. China’s housing prices had an almost constant growth up to 2021. It is well known that real estate is a pillar of the Chinese economy [2], which in turn implies large-scale exports of iron ore from Brazil (and Australia). Massive Chinese urbanization is changing the world’s economy and real estate markets, as one viral statistic showed recently where China used as much cement in two years as the US did over the entire 20th century [3].

Solid empirical evidence shows that current account deficits, real interest rates, and per capita GDP growth are the main drivers of real estate appreciation in the OECD countries [4]. Special attention must be paid to mortgage rates [5]. The US housing market suffered the effects of the 2007–2008 crisis, which resulted in a 30% real devaluation until 2012 and then exhibited a constant growth trend. It only returned to December 2007 levels in May 2020. The Euro Zone housing index suffered more from the effect of inflation, and that is the main explanation for its volatility. Still, Europe’s housing prices had a significant growth period (2015–2021) after the end of the euro crisis and before the pandemic’s and Ukraine war’s inflations, followed by a sharp real decline after that. Monetary shocks also play a key role in understanding house price cycles in Europe [6].

Interestingly, there is novel evidence showing that real estate is not only a reflection of global economic cycles but acts as a driver of these cycles, opening up growth cycles as a key autonomous component of the aggregate demand [2,7]. The study of real estate cycles has been of great importance in the real estate literature, although some important research papers in the field have not been updated [8,9,10].

As shown in the Figure, land prices, reflected in the house prices relative, are near the all-time records, pricing younger citizens out of home ownership and affordable rent. This requires land value taxation and housing policies around the world [11].

Empirical research has been using macroeconometric models, such as Vector AutoRegressive (VAR) models, to study the relationship between macroeconomic and real estate cycles, using variables such as the central bank policy rate, GDP, unemployment exchange rates, and inflation to explain the real estate cycle [12,13]. This is not the objective of this short essay, as aforementioned, but is detailed below.

This essay proceeds as follows. First, I will detail the relationship between real estate markets and the GFC. Second, I present the urban roots of the COVID-19 pandemic and its implications for real estate markets. Then, I explore the interconnections among real estate, cities, and technological revolutions to finally conclude with some ideas on the frontiers of real estate research.

2. Real Estate and the Global Financial Crisis

First, the acknowledgment of the real estate markets’ role in the GFC is well known both in academia and in the general public [1,2,14,15]. Much less attention has been devoted to the causes of it, given that simply blaming low-income households which have engaged in subprime mortgages is certainly a misguided explanation. The lack of financial regulation created a tremendous amount of liquidity, and virtually all the American consumers rode the wave of excessive bank lending and securitization, making this crisis more of a prime, rather than a subprime, borrower issue [4,16]. The end of the Glass–Steagall Act in the US in 1999, which was enacted after the 1929 Great Depression to prevent commercial banks from joining investment banks, led to the emergence of financial conglomerates. It created a mass of liquidity that flew to Internet firms’ stocks, later bursting the 2001 dot.com bubble, which in turn made the Federal Reserve (FED) cut interest rates. Historically low levels of interest rates, securitization, and the heyday of the “Ownership Society” boomed in the US housing market [14,15,17].

It is worth noting that the “US housing boom” was indeed geographically concentrated. It took place mostly in the West Coast, New England, and Florida, while the Rust Belt cities and the interior markets never boomed in that way [18]. Similar subnational heterogeneity was reported in the Panic of 1873 and the subsequent Long Depression [15]. New empirical evidence points out the existence of three endogenous house price regimes in the US, namely a nationwide boom regime, a spatially limited bust regime, and a nationwide bust regime [19]. Zhang et al. (2016) [12] showed that real estate cycles and their determinants vary within mainland China, and Lewis (2023) [13] brought this same question to Brazil, where Almeida et al. (2022) [20] showed that real estate markets are segmented across the urban hierarchy.

More importantly, however, is that the knowledge on real estate must be consolidated regarding the lessons that the world could learn from this crisis [21]. The pervasive effects of the GFC damaged our economies, jobs, and homes, and opened the doors to fiscal austerity and several extremist political leaderships in the ten years of its aftermath [5,22]. The literature points to the necessity of more regulation, combat speculation, and solid housing financial institutions to prevent future real estate bubbles and their contagion effects on the entire economy.

The failure of earlier macroeconomic models to predict and explain significant fluctuations in housing prices before and after the GFC spurred new research. Pre-GFC models lacked adequate linkages between the real economy, credit markets, and asset prices, including financial accelerators. Post-GFC studies addressed these deficiencies, integrating housing and finance into macroeconomic models. This led to financial reforms, macroprudential policies, and novel models of economy and housing [23].

Some structural characteristics of US society and real estate markets seem to be crisis prone. It is staggering the number of real estate crises the US has had in the last two centuries, from the railroad and gold rush booms and their associated land speculation crisis to the recent GFC [9,15]. Chicago had a well-described real estate bubble in the 1830s, during which time the per acre prices (in current US dollars) in the future Chicago Loop increased from $800 in 1830 to $327,000 in 1836, before falling to $38,000 per acre by 1841. Perhaps due to this American characteristic, US researchers have developed really long-run time series to account for real estate price variations, such as the classical Homer Hoyt’s (1933) [8] thesis, “One Hundred Years of Land Values in Chicago”, and the Nobel Prize-winner Robert Shiller [14], who built a national housing index beginning in 1890.

Kaiser (1997) [9] offered a deep study of the long cycle in real estate, based on historical data from the US commercial and housing markets. He concluded that prior to the real estate boom, there was an unusually large spike in inflation, which triggered an initially rapid rise in net operating income. According to him, rising incomes and rising prices attracted a large amount of investment capital, resulting in a disastrously large overdevelopment boom. Resulting vacancy problems drove net operating incomes back down to levels approximating those prior to the boom. Nonetheless, he cited Hoyt’s mature work (1960), in which the expert had said that real estate cycles were a result of the optimism and depression of masses of people rather than inflationary shocks.

Finally, the literature has increasingly recognized the role of cycles in real estate, including their psychological, irrational, and “conventional” (as post-Keynesian economics puts it) determinants [14,24,25]. This recognition brings a serious barrier to real estate valuation since much of the price variation is not explained by “market fundamentals” but by cyclic variables [26]. Interesting hypotheses have been raised in the face of these challenges to real estate appraisal [27]. The ship of the real estate appraisal might be losing its anchor or, in other words, suffering a disruption.

3. Real Estate and the COVID-19 Pandemic

Second, there is cutting-edge research showing that the COVID-19 pandemic has its roots in the extended urbanization process [6,28], a term coined [7,29] to describe the process by which a city expands its reach to distant regions, increasing the connectivity of such cities, their hinterlands, and the global urban network. Allegedly, the SARS-CoV-2 virus crossed the animal–human divide at a seafood market in Wuhan, a Chinese metropolis and a major transportation node with national and international connections. The emergence of COVID-19, Middle East Respiratory Syndrome (MERS), and H1N1 suggests that zoonotic pathogen transmission is a hallmark of 21st century urbanization and globalization.

Commercial real estate and massive suburbanization are closely related to it. After the COVID-19 outbreak, real estate returned to the spotlight once again. Public health calls for “stay at home” contrasted with the reality of those who did not have a home (housing affordability crisis). Home–office work became a global trend, and those who had the means hid themselves far from agglomerations in their secondary countryside residences. All these changes made significant impacts on real estate demand across the globe.

During the pandemic, governments responded to it by using fiscal policy (e.g., Corona vouchers) and monetary policy (cuts in basic interest rates). These policies led to real estate market reactions, as they had positive impacts on real estate prices. The “cheap money” years of COVID-19 provided considerable stimulus to real estate, as Figure 1 suggests.

After the pandemic, a supposedly “new normal” emerged, an expression that curiously was popularized by Bill Gross (PIMCO) in 2009 to describe the aftermath of the GFC [14]. Many workers are still working remotely, and many in-person activities have been substituted by online alternatives. These trends have spread the demand for housing away from metropolises with high-level rents and congestion, emptied commercial real estate in city centers, and boomed the warehouses of online shopping companies. Regarding housing supply and demand during the pandemic, new evidence has pointed out that that reduction in supply was a minor factor relative to an increased number of buyers in the tightening of housing markets during COVID-19 [5].

4. Real Estate and Technological Revolutions

Each industrial revolution requires a set of specific infrastructures and types of external economies, which are provided by cities, implying the emergence of new paradigmatic cities. In this sense, there were “Manufacturing cities” in the 19th century, “Fordist cities” in the 20th century, and we see now the emergence of a third wave of urbanization, with global city regions and smart cities, characterized by the “knowledge economy”. This argument contains a bidirectional causal relationship between innovations and cities. In one direction, technological revolutions gradually lead cities to adapt to the demands of new technologies [8]. New firms and sectors emerge, and even the modus operandi of firms previously established in the markets are affected. The structure of demand is also affected, either with the emergence of new products or with new forms of consumption of products that already exist. On the other side of the causal relationship, for a technological revolution to occur and spread, a set of requirements is necessary that only cities can offer, including interaction, dissemination of knowledge, transport infrastructure, housing, and sanitation, among others. Furthermore, innovation takes place in the city, depending fundamentally on the set of social relations and knowledge exchanges that are established in the territory, or cross-fertilization of ideas, as Jane Jacobs wrote [9,10,11,30,31,32].

Therefore, the techno-economic paradigms of information and communication technologies, as well as the Internet of Things (IoT), Artificial Intelligence (AI), Big Data, robotics, and automation, have emerged through the frequent interaction of researchers that can only take place in cities and their built environment and, at the same time, are reshaping cities and their real estate stock. Platform firms such as Amazon, Uber, and delivery apps have changed the way consumers access markets, having deep impacts on centrally located commercial real estate and warehouses. Internet broadband has paved the way for remote working and has fed the search for housing in amenity rich places far from the polluted and expensive central cities. Airbnb has been changing hoteling and lifting local dwellers’ concerns about touristic sites. All these changes rely on the real estate markets’ functioning. At the same time, they are disrupting the way real estate markets operate.

Within the realm of knowledge pertaining to real estate valuation, new technologies are changing real estate appraisal. Big data and cloud computing are making mass appraisal faster and more precise, allowing for the use of thousand hundreds or millions of observations. Spatial endogenous regimes combined with mass appraisal/hedonic price models have also shown promising results [33]. In the case of small samples, recent findings suggest that the Maximum Entropy Principle with Lagrange multipliers can be successfully employed for real estate valuations [34]. Random forest models are performing well in real estate research [35]. On the other hand, despite excitement with AI for real estate valuation, this approach performed poorly compared with the traditional ones, and authors warn about the need to establish guidelines, such as requiring AI property valuation services to ensure fair prices or disclose their algorithms and data [36].

Another pertinent area of real estate research is the necessity of house price indexes at the micro-geographic scales, such as neighborhoods. This is important for housing policy that is concerned with the regulation of rent, which depends on the ability of a regulator to enforce rental prices by observing local market trends. This is also important for economics research and real estate market monitoring to surpass the gold standard in house price index construction—repeat sales indices such as the Case–Shiller Home Price Index—which are not suitable for microgeographic areas because property transactions are rare events at this scale, let alone repeated transactions [37].

5. Conclusions

This short essay aimed to address some key events of the world’s contemporary lives, namely the GFC, the COVID-19 pandemic, and the emergence of new techno-economic paradigms, which have affected mankind in an irreversible manner. Real estate is at the center of the transformations in all these events.

Real estate literature may benefit from the many research avenues that this paper has mentioned. The careful study of real estate cycles and their relationship with the macroeconomic cycles is worth paying great attention to. Detailing real estate cycles in the subnational and intra-urban contexts is still a task to be further developed. The novelty of the COVID-19 pandemic still requires much more research to understand its impact on housing conditions, commercial real estate vacancies, and economic opportunities. However, the study of real estate market behavior and urbanization processes is relevant to produce public health guidance to prevent the emergence of pandemics, as well as to avoid pandemic dispersion. Finally, Industry 4.0 and the emergence of new city forms, such as smart cities, will certainly attract much attention in the coming years.

Beyond these keys events, the real estate literature has started to address climate change [38,39,40]. Climate change certainly has an impact on real estate appraisal, by affecting both the amenities and expectations of the future. In turn, “green land tax” depends on the reassessments on land value [11,41]. More importantly, the real estate literature must consider progressive proposals, housing affordability, intergenerational equity, and regional justice.