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Housing Frenzy: Generation Shift as a Significant Driver for Real Estate Bubble

1/10/2022
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Real estate prices have been on a record run for the past two years. Since 2019, 98% of the observed countries reported a growth in the House Price Index. One fifth of the countries saw their real estate prices increase by over 20%. Cheap debt, untamed inflation and undersupply of housing are the significant factors fuelling short-term growth. However, generational shifts will ensure the demand for housing stays bullish over the long haul.

Considerable wealth and evolving household constitution will enable baby boomers to remain active, downsize and try more novel housing models. Millennials will continue to search for their first properties, preferably more spacious, environmentally friendly and in suburban areas. Finally, Generation Z is expected to comprise the most pragmatic buyers, researching heavily before committing, extensively relying on opinions and reviews online, and acquiring properties at an earlier age.

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Baby boomers are the winners of bidding wars

Baby boomers (population aged 57-75 years in 2021) have been detrimental in the recent development of real estate markets due to their considerable wealth and evolving household constitution. In 2021, this demographic only constituted one fifth of the global population. Nevertheless, in developed countries, baby boomers accounted for nearly one third of the wealthiest social class A. Their lifelong accumulated wealth is traditionally linked to real estate, which appreciated with growing property prices. Moreover, baby boomers were unprecedently active in searching for real estate, often having the proceeds for the down payment from the sale of their current home and were debt-free, which increased their bargaining power and chances to win a bidding war.

However, evolving household composition has changed preferences for housing amongst baby boomers. As grown-up children moved out of the family home, baby boomers found themselves with an abundance of space. The pandemic, in turn, has increased financial uncertainty and expedited retirement plans for soon-to-be retirees. As a result, many of this older generation are choosing to downsize to smaller properties, facilitating steep demand for newly-built, comfortable smaller-sized properties. As a result, households with the smallest dwellings (one or two rooms) grew twice as fast as with those with three or more rooms over 2019-2021, increasing the demand for compact yet multifunctional furniture, consumer appliances, and consumer electronics.

Furthermore, baby boomers are keen to try new real estate models such as co-living and home-sharing. Multigenerational homes, where several generations live together, have been steadily growing in demand since 2019, as many seniors found that quarantining worked better with other family members. Moreover, co-living properties also offer advantages such as reduced expenses, improved companionship, and additional income for the owners. For instance, SilverNest, an online home-sharing platform, pairs ageing homeowners in the US with compatible housemates. As baby boomers become more confident with using technology, senior-friendly apps and solutions will become essential for every company, including those in real estate.

The inflated demand from baby boomers for properties is likely to be short-lived and could flatten out in the next two to five years. Nevertheless, this generation can moderate and contribute significantly to the recent real estate price rally by actively participating in bidding wars and paying with cash, which is unattainable for heavily indebted millennials or Generation Z.

Millennials are taking over the real estate market

Millennials (population aged 25 to 40 years in 2021) represent the largest ever generation, entering the family formation phase (30-39 years) and looking for their first homes. Having endured the Great Recession at the beginning of their careers and carrying a high burden of student debt, millennials have accumulated less wealth than other generations historically, forcing them to postpone purchasing their first property until their mid-to-late 30s. However, a rebounding economy, growing wages and better employment opportunities make many in this generation reconsider living with parents or renting. Furthermore, historically low interest rates mean that mortgages are becoming increasingly affordable. According to Freddie Mac, which tracks the US mortgage market, around 31% of older millennials and 43% of younger ones in the US do not have but could qualify for a mortgage, implying the growing purchasing power of this generation.

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Source:    Euromonitor International from national statistics
Note:        Data for 2021 is estimated

Digitally native millennials are revolutionising the real estate market by demanding more real estate services online (a trait they share with Generation Z) and are increasingly searching for sustainable and environmentally-friendly housing. According to Euromonitor International’s Voice of the Consumer: Lifestyles Survey 2021, more than 69% of millennials in 2021 tried to have a positive impact on the environment through their everyday actions, 66% were worried about climate change, and 63% felt they could make a difference to the world while choosing wisely. Therefore, it is unsurprising that properties with integrated sustainability credentials that extend from solar panels and green rooftops to electric vehicle chargers already sell at a premium.

Furthermore, millennials are forgoing expensive urban properties for more spacious suburban real estate. Rising real estate prices and demand for greener and more spacious areas are the primary drivers behind the growth. However, the pandemic has further exacerbated the trend due to the general re-evaluation of lifestyles, the increasing search for holistic wellness and a rise in remote working opportunities. According to the Voice of the Consumer: Lifestyles Survey 2021, nearly 39% of millennial respondents expect to work from home in the future. Therefore, the demand for suburban properties is not expected to recede.

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Generation Z buying properties earlier and smarter

Although not of high significance at the end of the review period, Generation Z is expected to manifest as one of the essential real estate purchasing groups by the end of the decade. Zoomers will account for 19% of the total population in developed countries and 24% in emerging and developing economies. Moreover, their average income will grow by 128% and 137% at constant 2020 prices by 2030, respectively. Furthermore, in favour of higher monthly payments, Generation Z consumers tend to put down lower deposits, which in some cases can be as low as 3%-5% of the selling price. As a result, Zoomers are likely to purchase their first home at a lower age than fellow millennials did in their 20s or early 30s, thus fuelling the already hot demand for real estate sooner rather than later.

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Priorities-wise, the digital spirit and pragmatism of Generation Z will contribute to the growing demand for innovative smart housing for well-researched prices. These younger consumers tend to research thoroughly before buying, compare prices and rely heavily on word of mouth. According to Euromonitor International’s Voice of the Industry: Lifestyles Survey 2021, 38% and 28% of Generation Z respondents reported that friends and family recommendations and independent consumer reviews are highly trustworthy. Therefore, impeccable reputation and high-quality services will become as important as ever for realtors over the coming decade.

imagedlvek.pngEuromonitor International Voice of the Industry: Lifestyles Survey 2021
Furthermore, tech- and media-savvy Zoomers will move real estate services online. According to Euromonitor International’s Voice of the Industry: Lifestyles Survey 2021, despite limited income and young age, globally, 83% of Generation Z respondents owned a smartphone, 65% browsed the internet on their smartphone, and 26% bought an item or service through a smartphone almost every day, making social media and apps the main channel to reach Zoomers. Zillow, Trulia and Redfin are just some real estate researching, viewing, comparing and purchasing apps available via smartphones, offering tours, open houses, and staging all virtually in addition to neighbour polls for tech-savvy clientele.

To buy or not to buy?

The primary question in real estate, “to buy or to wait?” is an equation with many unknowns. The real estate price rally should continue over the foreseeable future, yet there are several factors to consider in the short and longer term. In the short term, inventory shortages and supply chain bottlenecks might slow down homebuilding activities, while higher mortgage rates have the potential to reduce housing demand. Nevertheless, demographic trends and changing behaviour will overrule in the long term. An extensive number of ageing baby boomers will search for downsizing options to spend their retirement. Family-forming millennials will continue to relocate to environmentally-friendly suburban properties to enjoy remote working, whilst offering their children greater freedom. Meanwhile, Generation Z will revolutionise the real estate market by making it entirely virtual. Each of the generations presents a plethora of opportunities for companies that are willing to adapt.

For more analysis on population, please read Euromonitor International’s Global Population Trends report.

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