Fbankruptcy of the largest Chinese developer, Evergrande, record vacancy rate in office real estate in the United States, chain bankruptcies of real estate agencies in France, real estate prices falling sharply in Germany… The real estate crisis has begun.
By making credit more expensive and causing asset prices to fall, the rise in interest rates over the last two years has reversed the upward cycle of the sector, in which the players (investors, promoters, financiers, etc.) perhaps believed be that he would rise to the sky! To understand this turnaround, we must look at the transformation of the sector over recent decades. It can be summed up in one word: “financialization”. Real estate has no longer become what allows everyone to find housing, but a financial asset serving the accumulation of capital. Under the influence of finance, the real estate market has entered a vicious cycle.
Of course, real estate crises are nothing new, many of them have set the financial sector on fire in the past. The financial crisis of 2007-2008 was preceded by a global real estate bubble which burst with the rise in rates…
But let’s instead try to understand how, over the past decades, bankers, asset managers and investment funds have set the real estate sector on fire.
The financialization of real estate began with what we can call the “misuse of credit money”. Traditionally, banks create money by providing credit for business investment. In the post-Second World War period, the strong credit recovery was thus driven by business credit. But, at the turn of the 1990s-2000s, its very strong acceleration was accompanied by a change of destination: real estate credit took precedence over business investment credit, as had been shown economists Moritz Schularick, Alan Taylor and Oscar Jorda in “ The Great Mortgaging: Housing Finance, Crises, and Business Cycles » (September 2014, NBER). At the same time, banks began to buy more and more financial securities (public and private bonds, shares, debt securities, etc.).
Change of destination of credit
When, instead of going to productive investment, credit goes to the purchase of already existing real estate or financial assets, this has several consequences. First, speculative bubbles form, which divert money from the real economy. If, in the short term, this can support economic growth through wealth effects which give the owners of these assets whose prices rise the feeling of being richer and therefore of being able to spend more, in the longer term, when the bubble breaks out, a recession can result that destroys jobs and production capacity.
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