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Unaffordable homes: The case for residential investing

There is a clear need for more affordable housing, including single family and multifamily units, says PGIM Real Estate’s global head of investment research, Peter Hayes.

For the past 15 years, home prices in major cities in advanced economies have grown faster than incomes. The high cost of homes has caused an increase in the demand for rental housing. That creates an opportunity to invest in both the development of market-rate housing that could alleviate shortages and in dedicated affordable housing and conversions that would be developed with local governments.

Behind the pace

City office, apartment and retail markets that suffered during the pandemic are coming back into favor, and capital is finding its way into higher-returning operational assets, where returns are linked to trends such as digital transformation, aging populations and environmental sustainability. Even though the fundamentals of the housing sector have improved, too few new homes have been built to meet the rising demand for two key reasons:

1. A decreased appetite for development. Lower interest in property development stems from the global financial crisis. Realized losses across real estate portfolios during that period drove a risk-off mindset. In the private sector, investors shied away from developments and focused on assets with secure cashflows. Rising construction costs, tougher bank financing regulations and years of geopolitical uncertainty also dampened the appetite to develop.

For the residential sector, the development pipeline improved slowly but selectively. Before covid-19, private developers focused on delivering high-end apartments in major cities. The GFC also stretched government finances, and that limited the
provision of social housing. Today, even as urban jobs and population growth are recovering, supply bottlenecks and inflation are holding back new development.

2. Household finances hindered by weak wage growth. Many analysts expected that demand for housing would grow strongly after the GFC, spurred by the economic recovery. The post-GFC recovery, however, was driven by jobs and not productivity gains. Wage growth was weak. Against limited stock, house prices were driven up, and that forced more people to rent.

Emerging trends

In the years ahead, economic growth will likely trend lower because of aging populations and aging workforces. The pressures that have made homes unaffordable will persist, with some nuanced changes:

  • Younger generations are seeking greater mobility. They are often delaying marriage and parenthood. Their desire for flexible lifestyles, with the ability to move often, has led to a preference for renting over buying.
  • Families want more living space. They’re exiting urban areas, and remote working allows more people to live anywhere.
  • Government budgets are strained. Few governments today have the resources to spend more on affordable public housing.

These trends exacerbate the economic conditions – higher inflation, higher taxation and higher interest rates – that make housing unaffordable for many.

Residential investment has been a significant part of the investment landscape since the 1980s. Residential transaction volume as a share of all investment activity doubled in the past 10 years, according to Real Capital Analytics. That share will likely keep growing.