3 real estate disruptions we all need to prepare for
October 19, 2021
When I was growing up, my parents always said, “prepare for the unexpected.” Nothing rings truer today, as the world continues to fight a pandemic. In these uncertain times, one thing is certain – the next decade will be very different from the last.
For financially-focused Gen Zers who worry about becoming successful, what will the next 10 years look like? The oldest (aged 24) are already graduating from college and university, entering the workforce, and will be buying or renting their first home. In general, this generation will be making some tough housing decisions for the first time in the next decade. But what kind of economy will they be buying into? What challenges will they face? What skills will they need to be financially independent and resilient? How can educators, realtors and builders play their part in setting them up for success in the housing market?
Global crisis aside, a 3D wave is coming, and it’s going to disrupt the real estate market. Growing digitization, household debt and aging demographics will change the economic landscape as we know it.
1. The digital economy disruption
We’re currently in what many experts call the birth of the digital economy – conducted through technologies such as the Internet. Put simply, it’s the economic activity generated by billions of online connections among people, businesses, machines, data and processes. This digitization will disrupt labour markets, increase supply, keep inflation and interest rates low and increase debt.
To control costs and mitigate the squeeze on profits from a slower growing economy, companies will continue to modernize equipment and processes by investing in digital technologies. This could shift the production process from labour-intensive to capital-intensive.
What this means for Gen Z
In the future, workers will be armed with better tools to do their work and their productivity should increase. Meaning, it will take them less time to do their job, negatively impacting the average hours worked per week. With a shorter work week, Gen Zers craving financial stability may need to diversify their employment options, beyond one employer. This means the gig economy will only grow in size. And, coupled with the prospect of earning less than generations before them, it will challenge Gen Zers’ ability to be financially independent.
Housing affordability is already a growing concern – for owners and renters – and incomes may be hard-pressed to keep pace with higher rents and house prices.
Rental and housing affordability are reaching a tipping point, and more needs to be done to face this challenge head on. Educators, realtors and builders all have a part to play in positioning Gen Z for success.
Occupations that are more susceptible to automation are those that are founded in routine and don’t involve a high-level of social skills. To remain relevant, Gen Zers working in these fields will need to be able to use their digital savvy to innovate and create the tasks of the future.
Financial skills are important for both personal and career development. Few elementary and high school programs across the country include financial education as part of the curriculum. Basics of how the economy works, budgeting, savings and investing are not all mandatory course topics covered in the curriculum in a holistic manner, although some progress has been made recently. This is problematic, especially if we hope to put a dent in the growth of household debt in Canada. It’s never too early to learn financial literacy basics.
Canadian teens rank relatively well in overall global financial literacy scores, but score lower on more basic questions pertaining to the value of savings and how interest rates work. A recent Federal Consumer Agency of Canada survey found that households have trouble distinguishing between the amortization and term of a mortgage. They also don’t understand how compound interest works.
How realtors can help
Some of the more traditional functions of a realtor have been displaced by technology. What hasn’t changed is the value realtors add to the homebuying process. Although technology can help package data for buyers to help inform decision-making, some buyers don’t have the experience and intuition necessary to accurately analyze data and act on it. More importantly, buyers and sellers may not have the capacity to negotiate the best price in volatile markets.
Buyers and sellers will increasingly need to leverage a realtor’s expertise to participate in the housing market. In fact, many already are. Recent survey results indicate that 78 per cent of recent homebuyers leveraged the services of a realtor in 2019, up sharply from 61 per cent in 2018.
With housing affordability challenges and a growing need to rely on multiple sources of income to make ends meet, realtors will play a key role. In partnership with lenders, they can help manage Gen Z’s expectations by helping them make more rational housing decisions, ones based on their budgets and needs, not their wants.
While realtors master the art of helping clients make rational decisions, they also need to stay on top of and adopt the latest digital tools. Gen Z will expect virtual video tours via social media and digital information packaged in a way to provide deeper insights that they can act on immediately.
2. The debt disruption
The second element of the 3D wave is debt. Debt is a dirty word in some circles, but Gen Z has to understand how it impacts their short-term and long-term financial stability. They have to learn how to foster a healthy relationship with debt, by implementing winning debt strategies now. Their ability to buy or rent a home in the future depends on it.
When saving to buy a home, consider a variable rate mortgage, especially if you can tolerate fluctuations. Why? Eight times out of 10, you would have been better off historically. But take it one step further. Not only should you tie the mortgage to the variable rate, but try tying your payment to a fixed mortgage rate schedule. This will not only force you to pay down debt and build equity faster, it will help you manage interest rate risk should rates move in the opposite direction.
The foundation for financial freedom starts with a budget. Forget about having any luck with saving, investing and managing debt if you don’t have a budget. You need to create a monthly budget and make a clear distinction between what you need and what you want, so you can live within your means. Also, steer clear of the biggest budget killers – peer pressure, keeping up with latest tech devices, and emotionally-driven purchases.
The bottom line: Creating a budget and sticking to it forces you to live within your means and allows you to save and get and stay out of debt. This means you’ll be able to build wealth at a younger age.
When you buy a home, your bank or lender will give you a residential mortgage. This is considered “good” debt because it allows you to build equity. The more equity you have, the better off you’ll be, financially.
Owning a home is one way to build wealth, but you can also do it while renting or living at home. If the rent you’re paying is less than what you’d pay on a mortgage payment, you can channel those savings into building a solid financial portfolio with diversified assets, such as stocks, bonds and mutual funds. Again, this takes discipline and the presence of mind to have a budget.
3. The aging demographic disruption
Builders, city planners and the community also have a shared responsibility to set Gen Z up for success. How? By promoting more choice.
By 2030, households over the age of 65 will comprise more than 20 per cent of Toronto’s population. This ratio is 50 per cent higher than the previous decade, and represents the maturing of the younger and older boomer generation.
Households may be aging, but they are also living longer. As a result, aging in place will only accelerate. Given that most aging households live in lowrise housing, this will only further restrict housing options for younger buyers looking for space in the next decade.
What really matters for Boomer households is living in a community they are familiar with that provides important amenities, such as transit, retail and medical services.
More mid- to higher-density housing will not only provide seniors with more maintenance-free housing choices in their existing communities, but will also entice more listings and choices for Gen Z, as seniors vacate their existing space. To make this happen, we must embrace and promote collaboration between builders, city planners and the community.
How the industry can help
The building industry needs to alter the conversation from housing construction to housing production. The fact is, most homebuilders in North America build homes the same way they did 50 years ago. The speed of innovation and productivity growth in the construction industry has lagged other industries in Canada over the past decade. This needs to change, particularly given the opportunities that advances in technology will offer over the next decade.
First and foremost, leveraging technology will help alleviate accelerating labour shortages, owing to an aging population, over the next decade. Secondly, by manufacturing pre-fabricated parts in an offsite facility and shipping parts to a building site for final assembly will boost productivity. This will help reduce production costs, which in turn will restrain price increases and provide more affordable options for Gen Z residents.
It is reassuring to see some homebuilders having adopted these building practices, especially in Sweden, Australia and Asia. Closer to home, a few Toronto-based companies manufacture different home panels and use robotics for final assembly before shipping parts to local job sites.
The pandemic is a stark reminder of the uncertain times we live in. Preparing as best as we can for the 3D disruption will be the difference between success and failure. We all have a shared responsibility to guide the next generation along a path of success. We also have the luxury of history on our side. Identifying best practices that worked over time, while staying clear of practices that didn’t can help achieve better results. The courage of frontline workers fighting the pandemic tells me we will remain resilient in the face of future change.
About Ted Tsiakopoulos
Ted Tsiakopoulos is a professional economist and sought-after speaker with more than 25 years of experience analyzing housing and financial markets. He has also worked as an investment counsellor on Bay Street in Toronto.This is an edited excerpt from the best-selling book, Property Trendsetters: Successful Toronto Real Estate Experts Share Key Insider Secrets, published by Fatima Omar Khamissa & Platinum Publishing, and available on Amazon.