Building Cycles: Growth and Instability

The global economic crisis of 2008 was precipitated by a housing market crash, thus highlighting the destabilizing influence of the property cycle upon the wider economy. This timely book by a world authority explores why cycles occur and how they affect the behaviour of real estate markets.  The central argument put forward is that growth and instability are inextricably linked, and that building investment acts both as a key driver of growth and as the source of the most volatile cyclical fluctuations in an economy.

The role of building cycles in both economic growth and urban development is explored through a theoretical review and a comparative historical analysis of UK and US national data stretching back to the start of the nineteenth century, together with a case study of the development of London since the start of the eighteenth century.

A simulation model of the building cycle is presented and tested using data for the City of London office market. The analysis is then broadened to examine the operation of property cycles in global investment markets during the post–war period, focussing on their contribution to the diffusion of innovation, the accumulation of wealth and the propagation of market instability.

Building Cycles: Growth & Instability concludes by synthesizing the main themes into a theoretical framework, which can guide our understanding of the operation and impact of building cycles on the modern economy.

Postgraduate students on courses in property and in urban development as well as professional property researchers, urban economists and planners will find this a stimulating read demanding but accessible.

Preface

Abbreviations used in the text

1 Introduction: A Historical Approach

The idea of cyclical growth

A historical perspective

Historical examples

Imperial Rome

Tudor and Stuart London

An illustrative building cycle: London (1714 1900)

The structure of the book

2 Growth and Cycles: The Economic Debate

The underlying theme

The growth story

The classical economists

The neoclassical revolution

Technology and growth

Keynes

The neoclassical growth model

Modern growth theory

Historical dependence

Historical perspectives on business cycles

Pioneering studies

Measuring trend and cycle

A family of cycles

Long waves

Business cycle theory

Impulse and propagation: Multiplier accelerator models

Non–linear models

Rational expectations

New Classical theory

New Keynesian theory

Summary: Theories of growth and cycles

3 The Nature of Building Cycles

A long and violent cycle

Historical building cycle research

The first wave of empirical studies

Theoretical perspectives

The post–war empirical tradition

Three key studies

Modern property cycle research

Long cycles: Fact or artifact?

New perspectives and established traditions

viii Contents

The formation of market expectations

The integration of real estate and capital markets

Globalization and speculative bubbles

Towards a satisfactory theory of the building cycle

What we know about building cycles

A conceptual model of the building cycle

4 Building Investment and Economic Growth

Buildings as means of production

Investment and technical progress

Building versus equipment capital

Cyclical growth

Building investment as driver of growth

Building investment and UK (1855 2005)

A growth model with building capital

The trajectory of US growth (1929 2005)

Building investment as generator of cycles

The identification of economic cycles

UKinvestment cycles (1855 2005)

USinvestment cycles (1901 2005)

Appendix: The growth model

5 Building Investment and Urban Development

Urban innovation and accumulation

The city in history

Urban agglomeration

The growth of cities

Transport and suburbanization

A comparison of UK and US urban development cycles

The data

Structural models

Growth trajectories

Long cycles

Cycle phasing

Explanatory variables

Cycle histories

Variations in growth

The transport–building cycle

Turning points

A UK building cycle chronology (1785 2005)

Long cycles and major cycles

The first industrial revolution (1785 1856)

The second industrial revolution (1856 88)

The age of electricity (1888 1918)

Inter–war turbulence (1918 44)

The post–war consumer boom (1944 81)

The computer age (1981 2008?)

The London building cycle (1714 2005)

Middlesex deeds (1714 1900)

London house–building (1856 2005)

A London building cycle chronology

6 Case Study: The City of London Office Market

The development of the city economy

City of capital

The City in the sixteenth to eighteenth centuries

The Victorian and Edwardian City

The inter–war City

The post–war City

The growth trajectory of the City economy (1970 2005)

The City office–building cycle

Modelling the cycle

Cycle turning points

The cycle chronology

Victorian and Edwardian cycles (1866 1914)

Inter–war cycles (1921 35)

Early post–war cycles (1955 79)

The last two cycles (1979 2005)

Vintages of City office stock

Locational clusters

Building size

Redevelopment and obsolescence

Rent formation

Occupier profiles

7 A Simulation Model of the Building Cycle

Real estate models

Stock adjustment models

Rent adjustment models

Multi–equation models

Specification of the model

Underlying assumptions

Model structure

Determinants of model behaviour

Model simulations

Equilibrium and displacement

Cycle transmission

Damped and explosive cycles

Different construction lags

Floor and ceiling constraints

Persistent under– or over–supply

Alternative rent adjustment processes

Rent elastic occupier demand

Elastic depreciation

Business cycle in demand

Modelling the City of London office market

Take–up and occupier demand

Vacancy change

Rent adjustment

Development supply

Building completions

8 Property Cycles in Global Investment Markets

Instability and growth in real estate investment

The crash of 2008

The property cycle and the business cycle

Property as an investment medium

The post–war property cycle in the United Kingdom and United States

A model of the national property cycle

The housing market

The industrial and commercial property market

The interaction of occupier and investment markets

The globalization of the property cycle

The growth of the transnational investment market

Global cities, global cycle

The determinants of market behaviour

Some stylized facts about the global office cycle

The global diffusion of property innovation

The rise of the skyscraper

The spread of the shopping centre

Into the twenty–first century

Appendix: An error correction model of the property cycle

9 Understanding the Building Cycle

Building cycles and economic growth

Cyclical growth

Technological revolutions

Historical dependence

Growth and technical progress

Building investment and productivity growth

Technical progress in construction technology

Building cycles as driver of growth

Propagation of the building cycle

The trajectory of building investment

Impulse and propagation in cycle generation

A circular transmission process

Determinants of cyclical behaviour

A family of building cycles

The rhythm of post–war cycles

Building cycles and urban development

The urban development cycle

Urban growth and agglomeration

Innovation and accumulation in urban development

A self–reinforcing process of metropolitan growth

The transport–building cycle

Transport investment and suburbanization

The urban office economy

Integration of real estate and capital markets

Property as an investment medium

The contradiction between investor and occupier demand

The cyclical movement of real estate values

Contents xi

The intensification of the commercial building cycle

The property cycle and the business cycle

Speculative boom bust cycles

Globalization of the building cycle

The growth of the transnational investment market

The international convergence of cycles

The global office market

The global office cycle

The global diffusion of property innovation

Interactive innovation in retailing

Into the twenty–first century

Appendix A Building Trend and Cycle Analysis

Appendix B The Building Cycle Model

References

Index

Dr Richard Barras, Senior Partner, Property Market Analysis LLP

The range and scope of material covered is vast; that alone makes it a valuable reference source for anyone whose work touches on these issues, even if their research comes from a very different theoretical perspective.   (Urban Studies, 26 April 2012)

This is an excellent book examining the role that building cycles play in both economic growth and urban Development In general, the book makes a very useful and timely contribution to the building industry. It is good value for money and I have no hesitation in recommending its purchase for all people with an interest in building cycles. (Construction Management and Economics, 1 May 2010)