A Home to Grow Old In

Why is residential real estate so valuable? Two very simple reasons:?

1) everyone needs somewhere to live?

2) there are not enough places to live in

Homes slot neatly at the bottom of Maslow’s hierarchy, under physiological needs, and our ever growing population means that scarcity rules when it comes to houses and apartments. Of course, population growth is not the only reason why there are limited places to live: restrictive planning laws, exorbitant house prices and short term rental companies (I’m looking at you, AirBnB) all have their part to play, but the fact that the global population has quadrupled in the past fifty years is a major contributor.

However, it’s well documented that growth is not evenly distributed. Japan is the go-to example of a country whose population is in decline, which has resulted in millions of empty homes that are going for cheap. Urbanites, including foreign nationals, are buying abandoned homes in the countryside looking for a simpler, cheaper life. The Japanese government has also introduced initiatives to incentivise families to move from Tokyo to rural areas, offering financial support per child.?

Japan isn’t the only country with a declining population. Bulgaria actually ranks at the top of countries experiencing depopulation, with a 22.5% decline expected between 2020 and 2050, largely due to emigration. Even countries that are not technically experiencing a shrinking population (yet) are seeing population growth slow down. The UK falls into this category, where growth is expected to be slower over the next 25 years than over the previous 25. Most of the UK’s population growth is driven by net migration, while natural population growth is actually in decline.?

In ‘The Pinch’, David Willet asks the question: is it better to be part of a small cohort of people, or a large cohort? Intuition might make you think a small cohort is better as there’s less competition for resources, for example when graduating university and looking for jobs.?

However, it turns out that being part of a large cohort is far more advantageous, not least because you have more voting power and can mould political decisions to suit your needs and preferences, as opposed to your parents’ or kids’. It turns out that the Baby Boomers were a massive cohort and their decisions have had a decisive impact on our shared future (read: the acceleration of climate change along with a generational wealth divide).?

A declining population and a slowing population share the same thing: an ageing population. And the chunky Boomer cohort means that this ageing population is set to become supersized.?

What does this mean for house prices? According to estimates from LaSalle, the demand for ‘For-Sale Residential & Single Family Rental’ is relatively low for older age groups: people in their 60’s and 70’s. Which makes me feel like houses for people starting families should be getting cheaper over time. House prices in the UK have in fact been dropping throughout 2023, but this has got more to do with high interest rates and the fact that house prices over the pandemic were just outrageously high to begin with. So, I’m not getting my hopes up just yet. Considering that the average house in the UK is nine times the average salary, there needs to be more sustainable solutions to affordable housing apart from waiting for everyone to get older and move out of their big, four-bedroom houses.

But, it is clear that demand will change when it comes to the type of home that’s most desirable. A large, ageing cohort will need homes which are more suitable for their physical health, for one. Older people tend to suffer from more heat-related illnesses and are not able to naturally cool down as easily. Increasing global temperatures and more frequent heat waves are only going to exacerbate this problem. What does that mean for our energy demands when it comes to cooling homes? That’s along with considering all the refurbishments homes will need to ensure a safe environment for an older person: over 50% of homes are not suitable for people with restricted mobility.?

I’m fascinated by this whole topic. There will be so many changes required to manage this fundamental shift in societal demographics, and of course a lot of challenges and opportunities. As for residential real estate value, my guess would be to start investing in bungalows.?

Hope you enjoyed this week’s edition! Till next time.