Learning from the global crisis

There are lessons to be learnt from the current global economic crisis. Indeed, it is crucial to learn from past mistakes to move forward.

According to Paolo Garonna, the executive-secretary of the United Nations Economic Commission for Europe (UNECE), the crisis would not have become acute had real estate prices remained anchored in fundamentals. Instead, he says, demand was driven by the expectation of further price increases.

Although there are signs of recovery in the real estate sectors of European countries such as Germany and France, where the financial industry is well regulated, long-term solutions to the problems will require affected countries to address the root causes of the formation of real estate bubbles, Garonna tells City & Country in an email interview on the impact of the economic crisis on Europe.

“Individuals were encouraged to borrow excessively against the perceived value of their property and easy access to cheap credit exacerbated the situation by artificially increasing housing demand. Most countries in Europe that experienced housing bubbles over the last decade — which burst after the impact of the US subprime crisis — have suffered as a consequence of the current global economic crisis,” he adds.

According to Eurostat (a directorate-general of the European Commission that provides the EU with statistical information at European level), the bloc’s construction sector declined 14.1% y-o-y in June 2009.

Some of the affected countries include the Baltic states of Lithuania, Estonia and Latvia (with over a 30% decrease in 1Q2009), Ireland (-35.3%), the UK (-16.5%), Finland (-15.6%) and Spain (-10.9%), says Garonna, who is also the secretary-general of the Federation of Italian Banking and Insurance Associations and director-general of ANIA (the Italian Association of Insurers).

The professor of political economy at the LUISS Guido Carli University of Rome says there is an obvious need for improved regulation of both the real estate and financial sectors and for greater collaboration between private-sector advisory professionals and public-sector regulators. If anything, the solution to the present crisis should also prevent or reduce bubbles in the future.

“Given that the real estate sector seems susceptible to recurring boom-bust cycles, long-term policies can be implemented to reduce the volatility of investment and employment in this sector and to stabilise the asset value of housing for family finance.

There is a need to look at all possible compromises so that the restoration of growth is accompanied by increased environmental sustainability and social responsibility to ensure the provision of adequate housing for all,” Garonna explains.

He says the UNECE has a substantial role to play because any long-standing solution to the world crisis will require the continuous cooperation of the financial authorities of its member states.

The recently created Real Estate Market Advisory Group, which reports to the ECE Working Party on Land Administration, is working on the publication of guidelines to foster stability in the real estate and financial sectors, he adds.

Steven Xu Sitao, the chief representative of China for the Economist Group and director of advisory for Economist Intelligence Unit since 2004, tells City & Country that the global economic crisis has affected real estate prices across the republic. “Southern China was hit more severely. For example, Guangzhou and Shenzhen saw a 40% to 50% price correction in certain areas.

Nevertheless, the property market throughout the country has seen an impressive recovery. Beijing and Shanghai are doing extremely well. According to some local media estimates, the inventory of apartments in Beijing could last only a year,” he says.

However, Xu says, the global credit crisis hit China’s job market significantly. At least 15 million migrant workers who worked in the export sector have lost their jobs and have had to return to the countryside. This year has also been extremely challenging for university graduates.

So, what lessons has China learnt from the crisis?
“My opinion is that the necessary consolidation of China’s young real estate industry is being derailed by the stimulus package and extremely favourable liquidity conditions. As global central banks are paying lip service to the ‘exit strategy’, I suspect asset inflation [mainly real estate] in China could last a while,” Xu says.

He adds that there is a need for a faster pace of financial deregulation. “For China, the issue remains whether resources here could be allocated more efficiently so that the economy could grow in a more balanced fashion. There are a couple of areas in which financial liberalisation could gather momentum. For example, the internationalisation of the renminbi and the deregulation of interest rates are likely to provide additional impetus to the real estate market. In this way, the sharp appreciation of the renminbi could be avoided and real estate investment trusts would allow more consumers to invest in the properties.”

Both Garonna and Xu will be speaking at the Fiabci Malaysia Global Summit 2009 in Kuala Lumpur on Oct 3. Entitled “Reviving the Economy through Real Estate Growth”, the summit will be held in the Kuala Lumpur Convention Centre and is organised by Fiabci (the French acronym for International Real Estate Federation) Asia-Pacific and Fiabci-Malaysia.

They will be expounding on the topic “Recovering from the crisis: Lessons learnt and opportunities for real estate markets and the global economy” from a European and Southeast Asian and Hong Kong and Chinese perspective respectively.
The other speakers include Allan Saunderson, founder and managing editor of Property Finance Europe and Property Investor Europe, and Dr Philippa Malmgren, the former financial market adviser to the US president.



This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 774, Sep 28-Oct 4, 2009.