In his most recent Professor’s Comment’s newsletter, Dr. David Geltner included an intriguing projection: “the CPPI may not regain its 2007 peak value of 192 again until the decade of the 2030s or beyond.”
Note the graph below; it assumes the in approximate long-run equilibrium in 2000, and that nominal property prices grow sustainably (1% to 2% below CPI).
Geltner’s takeaway?
This is clearly a very simple, indeed simplistic, model. It could be wrong. But it helped me to call pretty well when and where the (at least temporary) bottom of the 2007-09 down-market would land. And it fits the 40-year, three-cycles-worth of history remarkably well. It presents the sobering prospect that the CPPI may not regain its 2007 peak value of 192 again until the decade of the 2030s or beyond, on a sustainable basis.
The simple model allows us to see when and to what degree bubbles occurred in the commercial property market, including both positive and negative bubbles.
The latter are the periods just following the collapse of the two previous market cycles, in the 1970s and 1980s, when the commercial property market fell below long-run equilibrium (sustainable) pricing, leading to losses that according to economic equilibrium theory were greater than necessary, but then resulting in sustained periods of super-normal investment profitability (without yet going into the next positive bubble).
The simple model in Figure 3 suggests that, so far, we have avoided going into a negative bubble in the bursting of the 2004-07 bubble. This in part no doubt thanks to government and industry policies and assistance, and in part thanks to lenders and creditors well remembering the experience of the last negative bubble in the early 1990s.
So far, “pretend and extend” has kept the U.S. commercial property market out of a negative bubble. But can it (or even should it) keep on doing that?… Can we get a solid recovery, soon enough, without dipping into the negative bubble? From 30,000 feet, this is a very interesting question.
this is not a surprising graph considering the numbers used. its fairly safe to say that well achieve these levels again sooner, but as it says, this would be on a sustainable basis. i find it interesting that the pricing fell right back in line with the trendline. with all the debt that needs to be rolled over, i feel we will see it dip negative for a period and bounce back positive by the end of he decade. (i know, im really going out on a limb on that one, haha). as for the last paragraph, i think the government should back off and let the market work this stuff out. if there is no pain, then no one learns a lesson. the markets will function perfectly well once its over with.
Joshua, thanks for the comment. We certainly agree that we’ll get there before the 2030′s. A fast return to the 2007 peak will most likely be driven by higher levels of inflation, rather than property fundamentals and investor sentiment.