The Layout For The Globalization Of Real Estate
We are in the last bull market for residential real estate. Yes, you read that correctly. When the bull market finally does end, whenever that is, 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 20 years: The Globalization of Real Estate.
Just like we saw the globalization of manufacturing flood the world with cheap products, 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.
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 lockdowns hit last year. 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. Last year, 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 primarily.
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.
- Phase 2
Here we see people starting to move to cheaper areas. 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.
In this article we covered a few of the technological trends that are in motion. There was a time where families were all located within 100 miles of each other. A few decades back, children started to go away to school and not return home. They migrated to where the jobs were, leaving behind parents and other family members. Therefore, shift like this can happen on a grand scale.
As countries like El Salvador, Ecuador, Mexico, and those in Southeast Asia start to realize what is taking place, they will be able to flood the world with cheap real estate. This is going to change the entire dynamic.
This is the last bull market in real estate simply because the bear, whenever it starts, will align with technological progress. Bear markets in real estate tend to last 6-9 years. If it starts in the next year or two, we will see that carry us near 2030. By the end of this decade, some of the technologies mentioned will be far more advanced than they are today. This means there is a greater likelihood all of this takes place.
One final point: Many of the countries with high real estate costs also have major demographics issues. So watch Germany, Italy, Spain, Japan, Canada, and South Korea. They are going to have to navigate through those issues over the next few decades in addition to everything else mentioned here.
What are your thoughts on this? Let us know in the comments below.
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