Around the world the cost of owning your own home has been going up making owning your home less affordable every year. Given that home ownership is every families biggest life expense, this is becoming a major problem. Could we reverse this trend?
The average cost of a home in the USA in 2019 was $295,300 for a 2,500sq ft (250sq M) home. In 2024 it has already risen to $329,000. That cost has been going up about 4.3% a year since 2011. The average salary in the USA is about $52,000. This means that even in the USA homes are becoming less affordable for the average American given that banks don’t want to lend much more than 3 – 3.5 times your annual salary (i.e. about $150,000). Even though this example is for the situation in the USA, the problem is a global one.
In addition, the macro economic trend is not helping to ease the situation. Far from it, it is actually making the situation worse as population growth has outstripped new home building for the past 20 years meaning that demand has outstripped supply pushing up the cost of homes even further since the great recession of 2008. The number of new homes (400,000pa) built since then has been substantially lower than before.
Today’s high interest rates have made home ownership roughly twice as expensive as the low interest period of the past decade and this is unlikely to return t low interest rates anytime soon.
On a micro economic level, the 2008 recession and COVID took out many laborers who were in the building trade and we now face a shortage of both labor and materials such as wood which are forcing prices up even more.
Clearly there is a big hairy home affordability problem looming that leads us to ask the question:
“How might we accelerate the world’s transition to more affordable, sustainable housing?”
If the mission is to accelerate the worlds transition to more sustainable and affordable home ownership, then the vision in tackling this problem is to prove that we don’t have to sacrifice any benefits when we choose the new affordable housing solution over conventionally built houses. If we do, it will not succeed as is the case with so many of the attempts to achieve this in the building industry so far i.e. Tiny homes, manufactured homes. In fact, the new solution should be better than a traditional home in every way, cost, comfort, sustainability and customization if it is to become the new way of living affordably and sustainably.
What is home affordability. Our definition is the cost of building, running and paying off the loan for a home over 30 years.
In theory the vision is achievable through 3 areas of innovation:
- Reduce the cost of building a home by 66%
- Reduce the mortgage length from 30 years to 5-10 years
- Take the home off the grid providing all its own services.
That seems much too simple, but it is not. Let’s look at these three innovation areas in more detail.
Reduce the cost of building a home by 66%.
Labor makes up about 40-50% of the cost of building a home today. This would be similar to any other product if hand made on site versus one that is built in a mass production way in a factory taking into account the economies of scale inherent in the mass production process.
The way we build homes today is similar to how all products were made before the industrial revolution – by craftsmen by hand, with the additional constraint of the weather which affects home build quality and the time it takes to build a home. The second huge constraint is that most homes are build as one off prototypes on site. Prototypes as we all know cost multiples more to produce than the resulting production item.
In order to reduce the cost of building a home by 66%, we have to remove most of the on-site labor cost through standardization, mechanization and mass producing the parts in factories. This will take care of 25-30% of the construction (labor) cost. Secondly there is a roughly 30% material scrap cost building on site. This takes care of another 15-20% of the construction cost.
Our vision is to produce a standardized component catalog that enables builders to build a wide variety of different homes based on a standardized grid. This will greatly simplifying the build process, making the assembly of the standard components and cores (such as bathrooms, kitchens and services modules) much less labor intensive. It will also enable the production of the components at a mass production scale. The remaining 26% saving will have to be found through the use of new materials, processes and structures which will also contribute to less building waste, a higher quality end product and a more energy efficient home. THis last point is crucial in order to take the home off the grid.
Reduce the mortgage length from 30 years to 5-10 years.
This condition will take care of itself if we can reduce the home build cost by 66% to $100,000. At that cost, the mortgage amount will be more like the cost of an expensive automobile than a home. It is possible to save a homeowner at least 50% off their present monthly mortgage payment and still pay off the home in 5 years. The interest charged on the purchase of a home is where the bulk of the money in home ownership goes, so reducing the mortgage to 5 years is the way to reduce the total cost of ownership of a home over 30 years substantially. Achieving a 5-10 year mortgage is vital to the success of reducing home ownership costs. At 10 years, the monthly mortgage costs would be roughly the same as todays mortgages for a $300,000 home!
Take the home off the grid providing all its own services.
The average ongoing costs of electricity, water and sewage amount to just over $109,000 over a 30 year period. That is more than the initial cost of a more affordable $100,000 home and that is not even accounting for the annual service cost increases through inflation. In order to make home ownership affordable and sustainable, you have to address the cost of services over the present 30 year mortgage period. The government is the least efficient service provider, at least in the suburbs where there is more space for each dwelling unit than in the high density inner cities. In order to create a sustainable, affordable home ownership alternative, it is vital to solve the problem of providing services locally either in sub-divisions or on individual properties. The technologies exist to achieve this and there are many examples of homes, even in cities that have achieved this, but there are no commercially available complete power/water/sewage systems yet.
The technological path to affordable, sustainable home ownership is clear and achievable today. The will, not so much, as it will require the disruption of the present building industry, banking systems and municipalities. But the benefits of substantially reducing energy and water usage, releasing people from being slaves to mortgages for the rest of their lives and creating the sort of comfort most of us can only dream of are worthwhile goals to strive for.