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

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 sector corresponds to more than half of the global wealth, and only the real estate sector provides 5 to 10% of employment and generates 5 to 15% of 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 – housing price indexes, all CPI deflated values from 2007’s 2nd quarter to 2024’s 1st quarter – for the three world’s largest economies (US, Euro Zone, China) plus India (fifth largest) and Brazil (seventh largest). It shows a global trend of 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). The massive Chinese urbanization is changing the world’s economy and real estate markets, as one viral statistic showed recently - China used as much cement in two years as the US did over the entire 20th century [3].

Solid empirical evidence shows that current accounts deficits, real interest rates, and per capita GDP growth are the main drives of real estate appreciation in the OECD countries [4]. The US housing market suffered the effects of the 2007-2008 crisis, which resulted in a 30% real devaluation until 2012, and after that exhibits a constant growth trend. It only reached 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.

Interestingly, there is cutting-edge evidence showing that real estate is not only a reflection of global economic cycles but acts as a propulsor of these cycles, opening up growth cycles as a key autonomous component of the aggregate demand [2,5]. 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 [6,7,8].

This essay proceeds as follows. First, I detail the relationship between real estate markets and the GFC. Secondly, I present the urban roots of the COVID-19 pandemic and its implications for real estate markets. Then, I explore the interconnection between 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 [1,2,9,10]. Much less attention has been devoted to the causes of it, given that simply blaming low-income households who 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 ride the wave of excessive banking lending and securitization, making this crisis as more of a prime, rather than a subprime, borrower issue [4,11]. 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 in 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 the US housing market [9,10,12].

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 Rust Belt cities and the interior markets never boomed in that way [13]. Similar subnational heterogeneity is reported in the Panic of 1873 and the subsequent Long Depression [10]. Zhang et al. (2016) [14] showed that real estate cycles and their determinants vary within mainland China, and Lewis (2023) [15] brings this same question to Brazil, where Almeida et al. (2022) [16] have shown that real estate markets are segmented across the urban hierarchy.

More importantly, though, is that the knowledge on real estate must be consolidated about the lessons the world could learn from this crisis [17]. 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 [5,18]. 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.

Some structural characteristics of the US society and real estate markets seem to be crisis-prone. It is staggering the number of real estate crises the US had in the last two centuries, from the railroad and gold rush booms and their associated land speculation crisis to the recent GFC [7,10]. 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, the US researchers developed really long-run time series to account for real estate price variations, such as the classical Homer Hoyt’s (1933) [6] thesis published in 1933 – “One Hundred Years of Land Values in Chicago” –, and the Nobel Prize-winner Robert Shiller [9], who built a national housing index beginning in 1890.

Kaiser (1997) [7] offers 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 is an unusually large spike in inflation, which triggers an initially rapid rise in net operating income. According to him, rising incomes and rising prices attract a large amount of investment capital, resulting in a disastrously large overdevelopment boom. Resulting vacancy problems drive net operating incomes back down to levels approximating those prior to the boom. Nonetheless, he cites Hoyt’s mature work (1960), in which the expert had said the real estate cycles are a result of the optimism and depression of masses of people rather than inflationary shocks.

Finally, literature has increasingly recognized the role of cycles in real estate, including their psychological, irrational, and “conventional” (as post-Keynesian economics puts it) determinants [9,19,20]. 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 [21]. Interesting hypotheses have been raised in the face of these challenges to real estate appraisal [22]. The ship of the real estate appraisal might be losing its anchor – it means, suffering a disruption.

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 was “Manufacturing cities” at the 19th century, “Fordist cities” at the 20th century, and now we see the emergence of a third wave of urbanization, with global-city regions and smart-cities, characterized by ‘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 existed previously. 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 – 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 – cross-fertilization of ideas, as Jane Jacobs wrote [9,10,11,25,26,27].

Thence, the techno-economic paradigms of information and communication technologies, and Internet of Things (IoT), Artificial Intelligence (AI), Big Data, robotics, and automation 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 obviously has been changing hoteling and lifting local dwellers’ concerns about touristic sites. All these changes rely on the real estate market’s functioning. At the same time, they are disrupting the way real estate markets operate.

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 affect mankind in a way that does not allow come backs. In all these events, real estate is at the center of the transformations.

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

Beyond these keys events, real estate literature is starting to address climate change [28,29,30]. Climate change certainly affects real estate appraisal, by affecting both amenities and expectations on the future. In turn, “Green land tax” depends on reassessments on land value [31]. More importantly, real estate literature must consider progressive proposals, housing affordability, intergenerational equity, and regional justice.