The 1985-1994 Global Real Estate Cycle. Page 17 more office space. Expectations were also fed by the prospect of the 1992 single market, and the European competition for the position of leading business and financial center.<sup>19</sup>

# IV. VOLATILITY IN INDIVIDUAL MARKET COMPONENTS

The massive Japanese land and equity asset inflation has triggered extensive discussions of the existence of a land bubble. Such discussions of the existence or non-existence of a "bubble" usually involve an element of definitional arbitrariness because of the implication of irrationality which bubbles carry.<sup>20</sup> (Stiglitz [1990], Flood and Hodrick [1990], Flood and Garber [19941). For the improvement of sectoral policies and institutions, it is the issue of economic inefficiency of real estate markets which is the central problem. Economic inefficiency is reflected in volatile prices and investment rates; it relates to the leads and lags of real estate investment behavior compared to current market conditions. (Case and Shiller [1988],[1989], [1990], Muellbauer [1994]).

Residential and non-residential markets have performed quite differently in terms of rents, capital values, and investment rates. The inefficiency of property markets across the main sub-sectors (offices; manufacturing and warehousing; retailing; hotel, leisure and recreation) has been in evidence in every country. Short-term and long-term returns across sectors have varied considerably. The global cycle has also exposed the inadequate to poor quality of the monitoring of the various components of the real estate markets. Most countries are as not well monitored as the UK in terms of tracldng rents, vacancy rates, and returns.<sup>21</sup> In the UK, the office sector has been the most volatile among the three main real estate segments of office, retail, and industrial property. The industrial property markets have been the least volatile, industrial development shows greater responsiveness to demand. With the evidence available, the following regularities can be reported for thbis first global cycle: 19 At the beginning of the cycle, in 1985, the total office floor space of the Paris region _(Ile de France)_ was 29 million of m2. Between 1986 and 1991 construction of 12 more million of squre meters was started, that is a 40% increase. Some _ddpartements_ (comparable to counties) experienced a 90% increase in investment during the boom, such as _Hauts de Seine,_ (Taffin [1994]). The JLW index of office capital values (1980=100) zoomed from 140 at the beginning of 1985 to 450 by the end of 1990. Correspondingly, the increase in office building permits within the Paris region was explosive: 1985: 1.285 million m2; 1986: 1.762 million m2; 1987: 2.289 million m2; 1988: 2.763 million m2; 1989: 2.564 million m2. On the basis of 20 m2 per office worker the implied growth in service employment was 110,000 to 140,000 new jobs per year just in the region (Philippe Saint-Marc [1994]). The London data also shows a similar pattenL 20 As Stone and Ziemba ([1993] point out, "On one hand, it would seem something of an artificial distinction to say that movements in interest rates are a fundamental factor, but the cyde of leverage these movements unleash are a speculative bubble. On the other hand, if the simple definition of a bubble is when investors are buying and selling on the basis that prices will rise further, then surly using the high price of previously purchased assets as collateral for loans to buy still more should qualify as a bubble".

21 The IPD (Investment Property Databank) currently holds records of over 14,000 individual properties with a combined value of £ 42 billion, which is estimated to represent approximately three fourth of institutional property holdings (see Nabaro, in Cross and Whitehead eds. [19941). By comparison, the Jones-Lang-Wooton Intemational office property data is quite infornative, but its coverage is limited to "prime quality office space of over 500 square meters in the primary office market of each of the [14] cities covered." Underlying the prevalent market segmentation, retail and industry markets are not covered.