The Size and Prospect of the Real Estate Market
Last updated
Last updated
he rise in real estate prices is a worldwide phenomenon. The Global Real House Price Index presented by the International Monetary Fund (IMF) portrays this fact. As a result of the 2007 U.S. financial crisis, well-known for the sub-prime crisis, housing prices fell and the rise in property prices seemed to stabilize. However, this was only a temporary trend. Open market manipulations, such as low interest rate policies and asset repurchase, which were made to resolve the economic slowdown in response to the financial crisis, expanded liquidity. As a result, the price of real estate, which had slowed for a while, began to rise sharply again, and the real estate price index recovered to its level in 2017.
As to illustrate this point, the real estate prices in the U.S. in 2019 increased by about 53% compared to 2011. In particular, major commercial metropolitan cities rose 90 percent year on year and China 46% from the previous year, up nearly 80.5 percent in Beijing, 16.4 percent in France, 63 percent in Paris and 30 percent in Japan.
Surprisingly, COVID-19, which recently hit the global economy, was no exception. This is because there is an “abnormal phenomenon” in major countries in which real estate prices continue to rise. According to a global real estate consulting firm ‘Night Frank’, real estate prices in 56 major countries around the world rose 4.7 percent in the past year as of the second quarter of this year. Germany had the highest rate of increase with 6.8%, while Canada (5.9%) and France (5.0%) were higher than the average. The U.S. (4.5 percent), Japan (3.7 percent), and the U.K. (3.5 percent) also rose. South Korea rose 1.3 percent.
Commercial real estate has continued to rise like residential real estate until early 2020. Although the capital and rental value of commercial real estate have recently fallen in short-term due to COVID19 and rapid decline of income, the market forecast is that there are no counter factors to quell the rise in real estate prices in the long term. Nevertheless, the capital value and rental value of each commercial real estate sector are expected to decrease sharply from 2020 till near-term due to the high vacancy rate of commercial real estate.
Despite this, learning from historical decline of real estate price, such as subprime mortgage has secured idle investment funds of financial powerhouses. In particular, it is noteworthy that liquidity due to the quantitative easing policies of each country is being absorbed into the real estate investment market with abundant idle funds. According to CBRE, Drypowderin private equity fund market, which accounts for 30 percent of the commercial real estate investment market, has accumulated idle funds of USD 205 billion.
The short-term commercial real estate market is projected to fall by the first half of 2021, while it is expected to rise again later. In particular, the decline in the rental rate of return is expected to be normalizeddue to a synchronized fall in the value of real estate assets. To sum up, given the difference from the 2008 global financial crisis, the commercial real estate market is also expected to recover by a time lag of about six months after the economic shock under COVID-19 normalizes.
When an economic crisis, such as COVID19, comes to an end, another market called NPL is created, which is referred to as the real estate-based distressed debt, or "NPL" market. As a result, commercial NPL products that boost investor sentiment in crisis, such as The Collapse of Lehman Brothers, are currently gaining the spotlight of financial investors.
