I expected Japan’s 67% drop in residential real estate to rebound substantially, even with its smaller, but still substantial millennial generation. But that hasn’t happened. So, I went digging to find out what was going on.
I’ll admit that this had me stumped for a while… until I began to understand that real estate was different than other consumer sectors of spending. It’s obviously not a consumable like food or clothing. But it’s not like a durable product either, like cars and washing machines. Real estate, with the exception of natural disasters or human insanity (arson, wars, etc.), tends to last forever.
This lead me to the realization that I couldn’t just predict the housing cycle by lagging births 41 years for peak spending there. I also had to subtract the dyers at age 79 (because dyers are obviously sellers!).
Here’s the result in net housing demand, allowing for later retirement in the future. It’s a whole different, and more sobering, picture…
(Click on image to enlarge)
Just look at that!
After this brief bounce in housing demand in recent years, net demand will drop into 2040.
Basically, we don’t need to build more houses for a long time, if ever!
Knowing that, do you want to be a housing developer, or even invest in them?
Yes, residential real estate will never be the same! It most certainly will be nothing like what we experienced into 2005.
The same logic applies to commercial real estate. It gets hit harder in downturns as businesses voluntarily abandon leases and real estate faster than households do (after all, we’re more emotionally attached to our homes!).
Commercial real estate is driven by the combination of new entrants adding to the workforce at age 20 (on average) and leaving the workforce when they retire at age 63 (although that retirement age trends up a bit in a bad economy, as we’ve seen in Japan).
So, look at this chart next chart, which allows for slightly later trends for millennials:
