24 November 2021

6 min read

🔔 A Big Property Mistake

Opening Belle

"Now that I can work from home, I want a bigger property" said 'everyone'

And off they toddled to the suburbs & countryside...

"City living is a thing of the past"
"Commercial real estate will collapse"

Plus loads of other things people said about property over the past 18 months...

There's no doubt that the pandemic did change the property market.

Locations that were previously undesirable suddenly became the opposite.

Now the dust is settling, Zillow have discovered that it ain't as easy as programming an algo & the market is calming down.

What does the future hold?

Depends on the timeframe, but demographic destiny is ready to rear it's head again...

So says housing analyst Ivy Zelman 👇

“The perception that housing is drastically undersupplied and that a strong demographic picture lies ahead is creating a false sense of security,’’ according to a report by Zelman’s firm entitled “Cradle to Grave.’’

“Population growth — the crucial underpinning of future housing demand — is on a troubled trajectory,”

“By our math, both single-family and multi-family production are already ahead of normalized demand and estimates of a housing deficit are grossly exaggerated.’’

The housing deficit has always fascinated me.

Housing shortage = Prices going up. It's obvious. Just build more houses and the problem is solved!

Nah. There's more going on...

Focusing on the UK housing market, Bank of England Research suggested that:

Relative scarcity of housing has played almost no role at the national level since 2000
By far the largest contributor is the lower discount [interest] rate, which accounts for almost all real house price rises since 2000

Full reports here 👇

Given the huge increases in house prices we've seen this year, what's the more likely explanation?

Has the entire developed world been under-building?

Or do low interest rates increase asset prices?

Maybe it's both, especially in areas of high demand, but there's little doubt that low rates have played a big part.

Zelman agrees:

“Rates matter”
“We think the market has been juiced”

And more houses ARE being built

...on the supply side, construction is dramatically ramping up.
There are more single-family homes under construction than at any time since 2007 and there are more apartment units under construction since going back to 1974!

Seems pretty clear-cut.

In the next few years, interest rates are more likely to go up than down, and loads of new housing supply coming to market should keep prices from rising further.

How about beyond that time horizon?

As this demographic cliff nears, what happens next?

Well, for an ageing population issue, it always makes sense to look at Japan for inspiration...

Like-for-like comparisons are tricky, as Japan has a very different attitude to housing.

Land prices have been pretty stable since the late 80's...

But houses have tended to depreciate over time, because cheaper construction materials were widely used.

The constant threat of tsunamis and earthquakes made it uneconomical to build with expensive materials, so most houses were cheaply built to last 30 years when they would be demolished and rebuilt.

Not very useful...

So, are there any lessons to learn from Japan...?

Perhaps...

Even as Japan's overall population has decreased, the population of Tokyo has continued to increase... 👇

And as the population ages, doesn't that make sense?

Typically, as people age they'll tend to move into communities & higher density residential areas.

Higher value is placed on ease of access to amenities, public transport, medical facilities etc.

Space and independence are sacrificed: A large garden becomes a burden rather than a pleasure.

So... As the population ages, who's going to buy the more rural properties?

Then there's the whole sustainability argument.

At what stage do governments and societies decide that it isn't efficient to maintain so many scattered towns around countries the size of the US?

Why not favour fewer, more efficient, sustainable cities so that everyone benefits from economies of scale, and services can be centralised, ensuring that the population gets what they need?

Isn't that the more sustainable, greener way forward that policymakers will be tempted to promote?

After all:

…current lifestyles and consumption patterns of the affluent middle class ‐ involving high meat intake, use of fossil fuels, appliances, home and work air conditioning, and suburban housing are not sustainable.

That quote is taken from the 1992 UN Earth Summit.

Could have been any year since as well.

Around that same time, the UN's Agenda 21 was signed, and later popularised by conspiracy theorists and the US tea party. 👇

Local planning and zoning commissions, which activists believe are carrying out a global conspiracy to trample American liberties and force citizens into Orwellian “human habitation zones.”

Maybe there's no need for the Illuminati to do anything, and we'll all just herd ourselves into the cities anyway?

Perhaps Tokyo will become the model to follow as we all age...

How Tokyo built its way to abundant housing

Tokyo illustrates another strategy: keep building more and more housing, far past the point of mere sufficiency and into the realm of abundance.

Whatever happens, demographics will become key in the years ahead and politics will play a larger role as Millennials begin to take over politically.

As Howard Marks said in a recent note:

In 2037 and 2026, respectively, Social Security and Medicare, benefit programs that aid older Americans, will likely become unable to continue paying today’s benefits.

And yet we don’t hear any discussion of the benefit cuts, delayed eligibility, tax increases, or means testing that would have to be part of any solution.

In fact, in the last 18 months Washington has approved more than $9 trillion of spending on Covid-19 relief and infrastructure, but we haven’t heard a word from either party about fixing these essential programs.

That’s presumably because the party that trims these programs would likely be penalized at the polls.

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