Behavioural decision-making is key to understanding asset price dynamics, asset cycles and the macroeconomic links. The most destructive cycles were those in which asset price leverage and credits were intertwined, causing the greatest systemic effects. Asset pricing dynamics impact economies from the local to the global level. Policy-makers, industry leaders and academics are currently debating whether asset-pricing dynamics can, or should, be managed in the public interest. The Shaping the Future of Real Estate initiative delves into the mechanisms of asset pricing to learn how to detect when and why markets shift away from fundamentals and how negative consequences can be mitigated.
Within its first year (2014), the initiative developed a strong brand by engaging leading experts, central bankers and businesses from the real estate, investors and financial services industries. At the World Economic Forum Annual Meeting 2015, the Forum released its first two reports on asset price dynamics with recommendations and case studies. The recommendations included both short- and long-term strategies for managing asset dynamics and the case studies highlighted both common and unique factors associated with the misalignment of markets.
In the second year (2015), the initiative focused on select recommendations made in the first year. High-level multistakeholder discussions took place to further define asset ecosystems and describe how the consequences of asset bubbles can be limited through innovative solutions. The focus was to help market players make more informed decisions. One work stream focused on designing a prototype early warning system to flag markets that will undergo severe downturns; a second work stream focused on institutionalizing the team’s insights and learning through developing an educational curriculum showcased through a case study.
This year (2016), we will emphasize the social angle of wealth destruction from unmitigated consequences of asset bubbles, particularly in housing. We will develop actionable recommendations as well as facilitate high-level multi-stakeholder discussions about how consequences of asset bubbles can be limited through innovative mitigation solutions. Potential mitigation options might include:
a) Novel funding/investing/financing options, new business models as well as new urban services with focus on public private collaboration to provide affordable housing solutions;
b) New financial instruments to mitigate extreme volatility and to encourage greater equity;
c) Appropriate risk-sharing and incentives through regulation, products and contracts have to be designed such that lenders retain risk and a position in the underlying real estate while adopting a prudent analysis;
d) Increased supply through urban planning and affordable housing solutions; Transparency and anti-corruption solutions; Regional specifics including emerging markets.
The proposed work will leverage on the findings of the Future of Construction and the Future of Urban Development and Services initiatives.