We are in the last bull market for residential real estate in the developed world. Yes, you read that correctly. When the bull market finally does end, it is over. We are then in a new era which will carry us forward.
This is a bold statement to make but it is all in keeping with what will emerge over the next 30 years: The Globalization of Real Estate.
Just like we saw the globalization of manufacturing flood the world with cheap goods, the Globalization of Real Estate will follow a similar path.
This will unfold is in three phases. We will cover them in this article. The reason this is happening is technology changes everything. Now it is time for real estate experience what other industries went through.
For the sake of brevity, commercial real estate is outside the scope of this article. That said, many of the factors do come into play with that.
Before getting into how this is going to occur, we need to take a look at residential real estate to size it up the areas of vulnerability,
The Present State Of Residential Real Estate
- The popping of the Artificial Urban Real Estate Bubble
We have not see a true market for residential real estate in 70 years. The market was completely skewed due to non-market forces. What resulted was a monopoly that gave huge advantages to urban areas from a real estate perspective.
Have you ever considered why most of the population of developed countries lives within a 70 mile radius of a city? Is it because people prefer to live on top of each other like sardines? Do they prefer traffic? Noise? Pollution? High cost of living?
The answer is no. So then why do people do it?
Here is where the skewing of the market comes in. We saw the migration for rural to urban areas start 70 years ago. It really accelerated 30 years ago when the globalization of manufacturing (along with automation) took place. Suddenly, urban areas had a monopoly on the high paying jobs. This is what forced people to move to the cities.
Those days are going to be coming to an end. In fact, we will see this in phase 1.
- Residential construction has not progressed in 100 years
We basically still build houses the same way we did 100 years ago. Other than doing the trusses off-site and using a crane to put them up, things are almost exactly the same. Sure we have compressors, nail guns and cement mixers. However, when you think about the building of a house, very little is different.
A lot is cleared and a foundation laid. The framing is done and then it is closed in. Adding in the trusses allows the roof to be put on. Inside, the electrical and plumbing is run, followed by the sheetrock going up. Add in flooring, appliances, tubs/toilets, and the bulk of the work is done.
And most of that work is still manual.
The Obliteration
Technology is going to upend both of these factors. We seeing how this will unfold.
- Remote Work
Over the last few months, we covered the concept of remote work. This is not a passing fad. It is the "new normal". This is in keeping with technological advancement and in alignment with the younger generation of workers. The idea of returning to the office like before is not going to happen.
The technology was in place when the COVID lockdowns hit. This allowed a rapid conversion to remote work. With people in this state for so long, they got accustomed to it. Zoom™ calls are now normal for most people. How many even know what a video call was before 2020, let alone how to make one?
We are also seeing more tools being planned by the likes of Facebook, Microsoft, Salesforce, and the cloud companies. They are going to give both workers and management more to work with.
What this means is that one does not have to be within driving distance of an office. Eventually, the idea of being able to work anywhere with just an Internet connection will become the norm. Think about it this way: if one sits in an office all day looking at a screen that is tied to the cloud, that can be done anywhere. That is a significant part of the workforce.
- By the middle of the next decade, we are going to see the cost of home construction drop by 70%-90%. This is another bold statement but it is in keep with Informational Technology.
The construction industry is going to be invaded by technology. We covered the proof-of-concept that is taking place using 3-D Printing. A number of articles were written detailing the progress of this technology in the housing market.
This is not the only game in town. We also have artificial intelligence, robotics, and the materials sciences which are working on solutions. This industry has not changed a great deal in over 100 years. That means it is primed for disruption. Any industry that has as much money tied to it is going to appeal to those who can radically alter it through technology.
We also have the space race on. While that would not appear to have anything to do with housing, the fact is we are seeing a lot of money going into research & development. One aspect of this endeavor is the approach of how to build in space. Often we find that space related developments have uses here on Earth.
While we are not exactly sure what technologies will become the norm, it is safe to say that advancement will be made to completely upend residential construction over the next decade and a half. If any of it follows the Information Technology trends, that will result in the cost reductions mentioned.
The Phases To Globalization Of Real Estate
Here is where we will cover the way this will unfold.
- Phase 1
This already started. We saw many people move from the cities to the suburbs. At the same time, there were people who were an hour outside the city who relocated to 3 hours away. Why did they do this? To lower their costs.
It was a move that was made possible by the shift to remote work. While not fully adopted, visits to the office were reduced to once or twice a month. This means that day, when 3 hours from the office, is pure hell. It is worth it, however, if the cost of living drops 25%.
Since it will take a few years for the remote work idea to fully sink in to the consciousness of both employers and the workforce, expect this phase to last until the middle of the decade.
We have seem many companies such as Twitter and Tesla look to bring workers back to the office. This is driven by CEOs who feel that people are more effective in the office. It is likely to wane as Millennials start to advance higher in corporations.
- Phase 2
Here we see people starting to move to cheaper areas within a nation. This happens when visiting the office is, at most, once or twice a year. At that point, one can hop on a plane when required.
Instead of assembling around the same cities, people are going to reverse the migration of the last 70 years. We are going to see a move from urban (or suburban) to rural areas. In the United States, people will go from the Seattle area to Eastern Washington State. Areas like Western PA and VA, Georgia, and Tennessee will be destinations.
The key will be the cost of living along with quality of life. As work allows for greater freedom, in terms of physical location, we are going to find millions seriously reducing their expenses.
We can expect this to start mid-decade.
- Phase 3
This is where we see the most change. It will take time for a couple of different reasons. To start, people are going to have to alter their outlooks dramatically. Also, countries will have to gear up for it. Thus, the quicker that leaders see what is taking place, perhaps they can jump to the head of the class and beat the others.
It is here where someone like the President of El Salvador could utilize those Bitcoin profits for infrastructure. The money can be used to build roads and hospitals. Also, it might be a good idea to stop waging war with the neighbors and making the place highly appealing.
Why go through this? Simply to attract 250K Americans making $65,000 a year. Since the cost of living will be a fraction of what it is in the States, the country can attract a plethora of fair high income earners.
Again, remote work allows people to work from anywhere. The number of digital nomads is going to keep growing. Ultimately, anyone who spends their day looking at a screen will be eligible for this.
Will everyone seek out this option? Of course not. However, a country like El Salvador only needs to attract 250K people earning this type of money to radically change its economic situation.
This is going to not start, on a large scale until the 2030s.
High Prices Areas Hit The Hardest
We know the supply/demand equation is going to affect things differently. Certainly, as more people move into an area, prices will start to go up. However, the price increase will not offset the decreases seen from the high cost areas with the exodus.
This might seem impossible to many people. The reason for this is we tend to fall into Paradigm Paralysis. This is where we know something so well that we find it impossible to believe that anything could radically change it. After all, we did it this way for 100 years.
Demographic Shift
One of the major factors that will play into this is demographics. The developed world is suffering from low fertility rates. This is going to affect the demand for real estate in many areas.
It is a process that is already underway.
Japan is a country that has dealt with this for over 30 years. The term "Akiya" applies to vacant houses in rural areas. These were left to family members after the owner passed away. Abandonment takes place since the next generations have no interest in relocating to the rural areas from the cities.
A situation like this is being reproduced in:
- China
- South Korea
- Germany
- Italy
It is not uncommon for some rural communities to offer free homes to people willing to commit to that area, usually for a minimum of 5 years.
This helps to exemplify the supply and demand dynamics that are in play. In many of these countries, we are dealing with long-term trends which are not going to reverse anytime soon.
Some areas are permanently in a bear market. This is diven by demographic shifts which will also impact the economy. It becomes a deflationary environment as the Japanese experienced.
Web 3.0
The entire shift could be accelerated by the move into Web 3.0. Many feel this is the next generation of the Internet. It will severely impact the future of work and, hence, real estate.
Web 2.0 is a siloed system. Corporations such as Facebook and Amazon control the platforms that people use. The basic architecture is applications tie into centralized servers. This means both the front and back ends are controlledby the same company. They are also the ones who financial profit from the activity.
The next generation offers a unique design. By utilizing blockchain, which is a decentralized database, applications write to a network that is not controlled by any company or individual. These DApps allow for greater flexibility which is likely going to enhance the amount of remote work available.
Cryptocurrency is going to have a major effect. Through tokenization, social media applications, for example, can be created that reward users in ways that Web 2.0 does not. This provides people with resources to eventually get involved decentralized finance (DeFi).
The belief is that many will be financiall enhanced by this shift, pushing people into another income bracket. People earning their living via the Internet should explode, transforming these people into potential digital nomads.
As they seek relief from high living costs, some are going to migrate to areas that get aggressive.
Governments Competing
There is going to be something occurring that we have not really seen. Governments are going to end up having to compete for residents. This will start are national economies start to falter. An upside down workforce, in terms of demographics, is not feasible. What is worse is this is bad for consumption, a vital part of any thriving economy.
Taxes are a vital component of any government system. As the population ages and economic hits are suffered, there is a reduction in the taxes that are collected. Abandoned properties, as an example, do not generate tax revenue.
Governments are going to have to combat this. With the local populations dwindling, their only solution is going to be pulling in people from the outside. Here is where the red carpet will be rolled out.
The developed nations will likely be the last to figure this out. It is a process that will start with the developing nations that can offer a significant cost of living savings. By the mid 2030s, a few nations will be aware of what is taking place.
As countries like El Salvador, Ecuador, Mexico, and those in Southeast Asia start to get on board, they will be able to flood the world with cheap real estate. People who are able to relocate due to having the resources generated online will find some of these destinations attractive.