A critical analysis of the real estate property market and its current challenges
In the following article, we will review several of the challenges facing the real estate market today, and that have been a source of inspiration to create BlocHome. Our underlying mission is to address important issues in real estate and to give BlocHomers the tools to face today’s market realities.
Rising housing prices in most development areas
Luxembourg, Europe, the US and major developed areas in the world are facing the same problem of rising house prices with double digit price year-on-year increases. In the US, the average home sale price has crossed half a million dollars for the first time in Q1 2022. In Luxembourg, property prices have increased by 124% just between 2010 and 2021 (Eurostat). What was once a social problem is becoming a societal problem.
Political action leading to increased state intervention in most countries is not the solution, it often worsens the problems.
Some years ago, not being able to afford a property primarily affected the lowest income class. Today, even most educated young people, representing middle-class and higher middle-class households, struggle to keep up with the rising real estate prices and have issues getting access to a first property. They stand now in direct competition with investors and investment funds, a competition in which the odds stand against the average person. It is likely that most millennials will not be able to become a property owner at any moment in their life.
This may produce a new, unprecedented, social crisis with the risk of undermining social cohesion of modern societies. If the new generation of our middle-class have the feeling that they only work to pay their rent and can’t see a possibility to once become a property owner, they will lose a big part of their motivation to work and contribute to society.
Housing price overburden
Rising prices of dwellings coupled with a scarce offer leads in most countries to housing cost overburden figures exploding. In Luxembourg the percentage of households that are considered as subject to dwelling cost overburden - paying more than 40% of their revenue for their dwelling – are growing at an accelerating speed. It thus becomes a political issue without a clear concept for the solution. In most countries the dwelling problems have been a political topic for years and decades, but solutions tend to fire at the price increases and are oftentimes counterproductive. Subsidies on the demand side have a clear price raising effect, new regulations often reduce the capacity of the sector to adapt the offer to market needs.
The market tends to be more and more investor-driven. In Europe today, still a majority of the occupiers are owners of the property. Unfortunately, this will soon become history. Not owning a property makes it difficult for the lower to middle social classes to create wealth during active years, which can avoid poverty at an old age.
High transfer costs
Real estate is a sector where transfers are heavily taxed. VAT, sales taxes, owner taxes, even living taxes for properties are some of the ways to tax property. Every transfer must follow legal procedures and requires multiple intermediaries to close a deal.
These high transfer costs turn your property into an inflexible investment. You will decide to remain in an area because you own a property there. If you sell the property, you will have to pay so many transfer costs that you may simply prefer to stay, even if you have a better job opportunity elsewhere.
High transfer costs are one of the biggest hindrances to mobility in the workforce. It is also one of the biggest obstacles to move to a more appropriate dwelling – corresponding to your family or physical situation.
Reducing transfer costs is one of the necessary challenges to be solved for more liquid housing investments.
Illiquid Assets
Real estate investments have been one of the major sources of wealth creation in the middle-class populations for decades. Post-war wealth creation was built on economic growth and property ownership. Both are highly challenged today
Lifelong living conditions are changing – social or economic changes influence people’s investment decisions. Most people no longer stay in the same job for their entire career. They not only change jobs often, but sometimes even their country.
Real estate is an illiquid asset for many reasons already described above. It takes time and costs money to buy or sell a dwelling. Thus, this investment is considered illiquid, and you only take the opportunity once your situation is fixed for a long period.
But times change, mentalities change, millennials are not used to engaging for many years. They need to think twice before investing in such an illiquid asset.
Furthermore, most real estate acquisitions are for own usage. Even if it is the most expensive investment you will do during your lifetime, it still only serves as housing. No cash is produced, no direct ROI. The subjective, emotional value of property is in no relation to optimized usage. Thus, property becomes dormant capital.
No market transparency
All markets need customer trust - trust in quality, trust in market prices, trust in real time assessment. If recent years have seen the development of real estate platforms and of online assessment offers, the customer, here the sellers and the buyers, are never sure to match with the right market price. Even with the help of a professional broker, the final price of the transaction is not guaranteed.
Buying a new dwelling, on plan or freshly built, is even more difficult for inexperienced customers. This transaction needs a strong trust relationship between seller and buyer.
The more the prices are climbing, the stronger the trust must be. But does the actual market situation feed market confidence?
Complex building procedures
In most urban areas, development of land is a really long and complex procedure with the intervention of multiple public and private actors during permit and construction phases.
Building procedures when selling apartments to individual retail customers make the construction process extremely complex, as each customer has the possibility to intervene in material decisions. Thus, not allowing for much standardization and industrialisation. This has a cost. Building procedures lack productivity gains over the last decades. This is not due to materials and construction itself, but mainly due to nonlinear decisions processes during the construction phases. For the customer, being a novice in construction materials, these processes might be too complicated and might inhibit an investment.
Throughout the lifetime of a building, renovation or energy efficiency works are hindered by multi-owner decisions procedures. The facility manager depends on the votes of each owner in an admittedly democratic, but slow and counterproductive, process. Some investors see no necessity in investing, thus leaving the building to devalue over time. Major renovations are very complicated, so that a lot of buildings are destroyed instead of being reused.
Complex contractual context
Selling or buying real estate is complex: multiple actors and contractual situations are necessary to accomplish a dwelling.
You have to sign a binding buying offer, then a buying contract, you must read a notary deed, understand the rules of the condominium, etc. So, a lot of complex legal paperwork. Many do not even understand half of the documents they sign.
On average, a retail customer must handle all these documents by himself.
The free-market forces have not yet addressed the upcoming challenges of the Housing sector: how to fight overburden of housing costs, and make sure that housing contributes to a more sustainable society.
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OUR LONG-TERM VISION
Today, BlocHome’s offer is mainly focused on its investment vehicle aspect, simply because we need to raise the funds required to finance our first building and get our project off the ground. This, however, will only be a first milestone in a long-term roadmap with a much wider vision addressing many of the issues raised above.
In the long-run, BlocHomers will be able to live in the community’s building. Thus, they will be able to partially own their housing, and cover rent for the difference. They will therefore be able to progressively move entirely away from rental and gradually increase their property ownership.
Our users will be able, for example, to:
- Move between properties within the BlocHome portfolio. For example in case they need to transfer to a new location for work.
- Adjust the size of their home according to their life situation. For instance in case of marriage, birth of a new child or divorce
- Simplify sustainable construction processes: having a new ownership structure, every building can be built, managed and renovated in an optimized manner.
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While lifestyles are becoming more flexible, housing has remained rigid. This is the key issue we want to tackle.
We believe that everybody should be able to have access to property ownership, even if it’s not full ownership of a property. By being a partial owner, you limit the risk of rental raises in times your salary is not adjusted. By being a partial owner, you do not pay rent to somebody else, at least not completely.
We believe you should be free to adjust your property ownership situation to your lifestyle and your life conditions.
If you are a member of an international community owning dwellings all over the globe, you are free to settle down anywhere you want, without having to support transfer costs, contractual challenges etc.
Currently, our society splits the population in two opposites: owners and tenants. BlocHome aims to help our society break free from this dichotomy and create a housing community without owner / tenant status, solely a community member status. Without this dichotomy, tenants are less inclined to damage the properties, since they own a part of it.