Thanks to advances in smart home technology, we are all living in the home of the future today. Sure, it may not be exactly what was envisioned decades ago, but it’s still pretty cool.
Passive houses are energy efficient buildings that provide year-round comfort without the constant need for heating and cooling systems. These homes save you money and they’re great for the environment, so it can only be a good thing if they become more popular.
When the housing bubble burst years ago, many homeowners found themselves underwater in their mortgages. This was certainly bad news for those homeowners, but what no one realized at the time was that there would be repercussions for years to come.
Today those homeowners are just starting to dig their way out of mortgages that kept them in homes they had long outgrown. Equity has been slow to build. As a result, people are staying in their homes longer out of fear or because of lack of capital. This means fewer starter homes on the market for first time home buyers.
Millennials are struggling to buy homes even though they surprisingly want to do so. Their savings are practically if not literally nonexistent, and they are often saddled with student loan debt. Millennials associate home ownership with the American Dream more so than previous generations, so lack of savings and escalating credit standards are grinding the housing market to a halt.
Modern comfort comes at a price, and keeping all those air conditioners, refrigerators, chargers, and water heaters going makes household energy very expensive. Here’s what uses the most energy in your home:
Cooling and heating: 47% of energy use
Water heater: 14% of energy use
Washer and dryer: 13% of energy use
Lighting: 12% of energy use
Refrigerator: 4% of energy use
Electric oven: 3-4% of energy use
TV, DVD, cable box: 3% of energy use
Dishwasher: 2% of energy use
Computer: 1% of energy use
One of the easiest ways to reduce wasted energy and money? Shut off vampire electronics, devices that suck power even when they are turned off. A penny saved is a penny earned, and being more efficient with your energy use is good for your pocketbook and the environment.
Architecture should be more than an intersection of art and commerce. Architecture is almost a political work. There is a condemnation of architecture’s passivity and its inability and unwillingness to confront or resolve the socio-political complexities of urban life.
While there are many talents working in the field today, there are very few people who you can name around the world who manage to combine extraordinary inventiveness and innovation in their design work and who are also at the very center of contemporary thought, engaged with contemporary issues.
We are in a radically divided world in which architecture is not dealing with those political issues in a really sophisticated way. Both the art world and the architecture world are clearly dedicated to political correctness and therefore are pretty intolerant in terms of engaging with political worlds beyond Western democracies.
One of architecture rarely questioned self-mythologizing pretensions has been that architectural work is less ego-driven and less author-driven, and therefore architects convince themselves all their buildings are completely different and don’t look like each other, something reminiscent of collectivity. A generic architectural style does not offer an escape from the extravagance of individual architecture.
Within a decade, our living spaces will be enhanced by a host of new devices and technologies, performing a range of household functions and redefining what it means to feel at home.
The promise of devices that not only meet our household needs but anticipate them as well has been around for decades. To date, that promise remains largely unfulfilled. Advances such as the Nest thermostat by Alphabet (parent company to Google) and Amazon’s Alexa personal assistant are notable, but the home-technology market as a whole remains fragmented, and the potential for a truly smart home is still unrealized.
A tipping point may be at hand. Increased computing power, advanced big data analytics, and the emergence of artificial intelligence (AI) are starting to change the way we go about our busy lives. The vision we present may seem out there, but it simply represents the confluence of those technological developments and realization of existing trends. Those trends, along with what’s just on the horizon, according to our research, suggest to us that within a decade, many of us will live in smart homes that will feature an intelligent and coordinated ecosystem of software and devices, or homebots, which will manage and perform household tasks and even establish emotional connections with us.
A smart home will be akin to a human central nervous system. A central platform, or brain, will be at the core. Individual homebots of different computing power will radiate out from this platform and perform a wide variety of tasks, including supervising other bots. Homebots can be as diverse as their roles: big, small, invisible (such as the software that runs systems or products), shared, and personal. Some homebots will be companions or assistants, others wealth planners and accountants. We will have homebots as coaches, window washers, and household managers, throughout our home.
We are already entering this new era. In two years, we expect to see more items in our living space become interconnected—the formative first stage of a new home ecosystem. In five years, numerous tools and devices in the home will be affected. And in ten years, smart homes will become commonplace and will regularly feature devices and systems with independent intelligence and apparent emotion.
That level of home improvement presents significant opportunities, threats, and changes for appliances and devices that have been part of our home life for generations. The new home will be built on a foundation of platforms and ecosystems, whose producers will need to establish new levels of trust with their customers. Competition will take place not just for the consumers who inhabit the smart home, but for the interactions between consumers and homebots that increasingly will shape buying behavior. It’s not too early for a wide range of players to start laying the groundwork for success in the home of the future.
Platforms will provide the foundation to integrate different devices while providing a consistent interface for the consumer. Frontrunners include Amazon, Apple, Google, and Samsung; start-ups at various points in the development cycle will be part of the mix, as well. The winners will deliver omnipresence though ubiquitous connectivity and go-anywhere hardware, as well as integration, with bots collaborating among each other and linking to third parties’ products and services. If the recent past is any indication, it’s likely that multiple platform standards will evolve. That will present complexities both for consumers and businesses but will foster new, niche opportunities, as well.
Developers will create bots that plug into the new and various platforms. In short order, this combination of platforms and bots will mature into an ecosystem of products and services. Platform companies are likely to develop their own AI-driven bots (the descendants of Amazon’s Alexa and Apple’s Siri, for example). Many other creators will develop unique homebots that integrate into different platforms, much as the apps of today have been developed for Android and iOS, which support the impressive mobile-device ecosystems we see now.
Likely, too, a hierarchy will emerge: we can expect a master bot that acts as general manager, juggling many services; service bots that handle a set of functions related to a more complex task such as managing media; and niche bots that perform single tasks, such as window cleaning. For now, put aside grand visions of a single, Jetsons-style Rosie the Robot replacing a human maid in toto; think instead of multiple bots performing separable, specific tasks. Well-defined scope presents much less risk of error. If you have a robot at home, you can’t have it run into your furniture too many times. You don’t want it to put your cat in the dishwasher even once.
To better understand the homebot opportunity and potential obstacles to its realization, we conducted in-home and mobile diary studies in Japan and the United States with dozens of consumers who are already using AI products or services where they live. We found that satisfaction with individual smart devices runs high. Today, people are quite willing to invite homebots into their lives to address a broad array of specific use cases: from doing individual chores to completing a more complex set of tasks to managing even certain elements of child and elder care.
But we also found there’s a crucial variable that will determine the speed and extent to which consumers truly embrace smart homes managed by homebots. The overwhelmingly determinative factor for consumer acceptance that emerged from our research was trust. Trust is initially based on the bot’s ability to perform its task, as might be expected. That does not always go as planned. But once trust is established, people are willing to cede more responsibilities to devices and systems powered by AI. One key to creating that trust will be creating bots that are more than mere automatons. After all, humans are wired for emotions. Our research confirmed that consumers are satisfied when a bot gets a task done, but they are delighted when there is a more personal, emotional element to how the bot does it.
At the same time as competitors in the smart-home space are figuring out how to create trust, they also must learn how to compete in a new landscape where the winners are influencing the homebots themselves. As consumer–bot interactions become a new nexus of competition, a variety of players will need new skills in designing bots, marketing products and services to them, and building business models that exploit their position at the center of the home.
Increasingly, designers will tap into and even advance data science to develop solutions that go beyond addressing static insights. Likely, that will entail solutions that are at least in part AI-driven, in order to react instantly and evolve constantly for the needs of customers. By understanding customers through a variety of approaches including ethnographic research and AI-generated insights, designers can help guide businesses through the complicated tangle of interactions and diverse engagement models. We expect solutions will migrate from screen-dominated interfaces to more physical and even atmospheric interactions. Companies that have more compelling and intuitive engagement models between bots and consumers—and can achieve significant market penetration first—will hold the competitive advantage.
To become machines that are truly integral to peoples’ home lives and to establish genuine trust, bots will need to connect with and relate to humans. That’s hard, and it goes beyond AI to the realms of artificial emotion (AE). AE encompasses attributes such as tone, attitude, and gestures that communicate feelings and build an emotional connection. Consider Alexa. Several of our interview subjects told us that they think of Alexa as a friend. That doesn’t develop from merely providing the train schedule when asked. It comes because Alexa evokes a sense of support, through its sensitive omnipresence and nuanced voice interaction. Interacting with Alexa really is like talking to a friend.
As consumers trust bots more and in turn cede to bots more control over their home management, people will become less involved in the active decision making that goes on in daily home life. For providers of home goods and services, this means that bots will increasingly become the customer— or at least an important intermediary between a selling business and a human purchaser.
Marketing for bots certainly gives new meaning to the term robocalls. But it also poses a serious challenge: How can businesses position their products and services to a bot so the human consumer will passively allow, or actively ensure, a purchase? We expect that the marketer’s mission will be comparable to the steps one takes to rank one’s product or service at the top of an Internet search result. Just as companies focus on search-engine optimization, they will need to develop metadata and tagging systems that are optimized for homebots.
Given the simplicity of automated purchases and refills for many household products, sellers will need to focus on getting into a homebot’s consideration set and optimize features to win the likely comparisons embedded in a purchase-decision algorithm. That calls for an approach that is much harder than one and done. Given the speed and reach of AI, providers will have to monitor bot purchasing behaviors continuously and be vigilant in tracking competitors’ moves going forward.
The stakes are real; a shift in AI preference toward a competing product could reduce demand to zero. The once all-powerful intangible power of a brand may now be reduced to a tangible sum of its parts. As AI gathers inputs across consumer networks, unpleasant consumer experiences or negative feedback could have near immediate impact on bot purchasing preferences. As a result, analytics and marketing will need to be rapid, responsive, and agile. Consumers who can’t be bothered to search for the right purchase or are overwhelmed by the complexity of choice can have a homebot scan constantly based on variable individual preferences (such as cost, appearance, and durability).
We expect that a wide range of homebot business models and use cases will emerge. Not only could homebots be purchased or rented for a specific task, people may share or rent them out to others. It’s conceivable that networked bots will work together across households, for example, to increase processing power, share expenses, or even partake in buyer co-ops to benefit from bulk pricing. Each of these models creates opportunities for new revenue streams.
The greatest source of value may come from the data. Bots will acquire and generate reams of information, and these data points will be critical for increasingly data-driven projects and services. Data will be sources of insight and even products in their own right. And understanding the implications, opportunities, and information about the smart home won’t be someone’s part-time job. It will require a dedicated team to parse the data, develop strategies, manage partnerships, and drive experiments that will become integral to creating value.
Businesses that seek to compete in the smart home can begin their housework early. A network of functioning bots is, in effect, an ecosystem of capabilities. Each bot will need to follow standard protocols to communicate with one another. But while a house may be bounded by four walls, a homebot ecosystem extends into the ether; it has to, as bots will need to interact with markets and networks around the world. Smart cars, wearables, and mobile devices are but a few examples. How all those systems talk to one another will be the core IT challenge for the foreseeable future.
On the technical side, mastery demands an intimate understanding of AI technologies and how they work with one another. On the strategic front, it’s worth the effort to identify what your company’s competitive advantages are or may become and then imagine how these advantages could align with the homebot value opportunities that are likely to emerge. Remember: the smart home will require different parties to work together. It’s not too soon to take note of players developing complementary—or potentially competitive—capabilities, and consider opportunities for potential partnerships. Most important, keep in mind that the success of homebots and smart homes is not wholly about technology. Rather, smart homes and bots are about how technology makes us feel. The objective is to meet the needs of human consumers and to make a house feel like home.
Real-estate developers should accept that business as they have known it is changing. By adopting new construction technologies, they can improve delivery and affordability. Imagine if people could design and develop their dream homes simply by going online to find the solution that best suits their means and lifestyle. Imagine being able to pick from a menu of standard base designs and being able to customize fittings, furnishings, and smart equipment. Then imagine being able to use a digital interface to obtain quotes from vetted contractors for everything from surveying the plot to assembling the house. And the pieces of the house itself arrive in the form of prebuilt panels and modules in a container from a centralized robotic factory. This is what is meant by “industrialized delivery systems”—and these will play a crucial role in the future of the real-estate and construction sectors.
In reality, early versions of this future already exist, with several venture-funded home builders in the United States aspiring to channel the customer-experience revolution pioneered by consumer-goods companies into the residential-property space. We are likely to see the creation of standardized home-building platforms, with developers working with an ecosystem of companies providing an array of fittings, furnishings, and equipment solutions. The result is a seamless customer experience and a more sustainable end product.
Skeptics may argue that such industrialized delivery innovations will focus on the lower-priced segments of the market, while the construction of high-end real estate will remain unchanged. Early evidence suggests, however, that this will not be the case. Industrialized delivery systems are poised to disrupt the real-estate sector across all asset classes and price points.
There is little doubt that the construction process adopted today badly needs innovation, mainly to improve the speed of delivery and reduce the dependence on manual interventions. A key enabler for this transformation is modular design, geared for production and assembly rather than field-based on-site work.
We are already seeing progress toward this future. Three technologies that already exist are of particular interest.
Virtual design and construction (VDC). Digital platforms, such as 5-D building-information modeling (BIM), enable the creation of a “virtual twin” of physical projects. This not only allows design optimization—in the form of more precise estimates, value engineering, constructability, and interface checks—but also provides transparency and project-management oversight over the life cycle of the project. Coupled with emerging industry trends, such as integrated project-delivery contracts, VDC is a powerful tool to help finish projects on budget, on time, and on spec.
To realize the full benefit of using 5-D BIM for projects, developers and contractors must fundamentally rewire their design, estimation, and project-management processes. That means contractors and clients must work closely together, backed up by clear contracts, to share both risks and gains.
Prefabricated, prefinished volumetric construction (PPVC). PPVC involves the factory construction of interlocking building modules, each equipped with internal finishes, fixtures, and fittings. These elements are then transported to the site for assembly and installation.
PPVC is slowly but steadily gaining popularity because it accelerates the construction process, with productivity gains of as much as 30 to 50 percent, according to case examples in Singapore. PPVC works particularly well for less-complicated and standardized designs. Other benefits include higher, more consistent quality; less waste; and better health, safety, and environmental performance because of the shift from chaotic field sites to a more controlled factory environment.
Singapore is one of the leaders in the use of PPVC. The city-state’s Building and Construction Authority encourages deployment of this approach—not just for hotels, hostels, dormitories, and industrial facilities but also for middle- to high-end residential developments. The technique can accommodate both concrete and dry walls. It is also corrosion free and fire safe. So far, it has been used in buildings as high as 25 stories.
Deploying PPVC implies changing design standards, assumptions, and processes to adopt the Design for Manufacturing and Assembly approach. It also requires better production-planning, supply-chain, and logistics-management capabilities, given that modules need to be produced remotely and regularly shipped from factories to sites. These are areas in which many contractors are lacking. Few in the sector have anticipated this shift from construction to production, let alone budgeted and provided resources for it.
3-D printing. While 3-D printing has not yet been widely applied in construction, developers and contractors should keep an eye out for innovations here. 3-D printing will likely be an important part of the shift from the field to the factory. Experts believe that one core application of 3-D printing could be in realizing complex, iconic facades and architectural features previously thought too expensive or time consuming to produce.
3-D innovators are scaling up this technology, by developing printers and design methodologies to create building units up to 200 square meters in size in less than a day. Significant R&D efforts are also under way in universities to print individual structural components and architectural features.
The construction industry is poised for big cultural and technological shifts as it embraces digitization across design and delivery processes. The real-estate industry is set to gain from these developments, not just as the result of efficiency and productivity gains but also by providing a richer and more satisfactory customer experience.
The larger benefits could be profound. By cutting costs, speeding up construction, and improving quality, industrialized delivery systems can also help provide the decent, affordable homes that families around the world need.
Limiting foreclosure will make mortgage-backed securities riskier and banks lend less. During the U.S. subprime crisis, many homeowners struggled with their mortgage repayments and foreclosures became rampant. Banks and mortgage servicers are often criticized for taking a tough stance in foreclosing mortgages. One determining factor in whether a mortgage was foreclosed or renegotiated during the crisis was if that mortgage was privately securitized by investment banks. The U.S. government provided monetary subsidies to mortgage servicers to encourage them to renegotiate delinquent mortgages instead of foreclosing. On the surface, this is good for homeowners.
But trying to limit foreclosures makes it more difficult for banks to securitize these mortgages in the first place, which in turn, makes it more difficult for them to lend to more prospective homeowners. In other words, foreclosures, even if they create losses for homeowners and investors, are playing a positive role in facilitating securitization.
Mortgages are illiquid assets that are paid off over many years. Traditionally, banks have to hold the mortgages on their balance sheets until full repayment. Securitization, a process in which securities backed by the cash flow from mortgages are sold to investors, allows banks to raise fresh capital to lend to more prospective borrowers. That is, securitization supports liquefying of assets and thus, lending and investing.
Similar to the problem of lemons in the used car market, investing in mortgage-backed securities (MBS) is risky because banks know more about the true quality of mortgage pools than investors do. Banks therefore have to find ways to reassure buyers that they are buying into securities backed by strong mortgages and that if homeowners do default, they will be able to recoup part of their investments. When banks pre-commit to a tough foreclosure stance they send a signal of confidence to outside investors that the bank has a pool of high-quality, low-risk mortgages.
When a homeowner defaults on a mortgage, the banks typically have two options: to modify the terms of the mortgage in order to keep it alive or to foreclose it and reclaim the property for sale. Modification entails risks that the homeowner might re-default if the economy continues to deteriorate whereas foreclosure is a quick but costly way to recoup cash. Poviding safe cash flow in bad times is particularly valuable to MBS investors, precisely because they were unsure about the quality of the mortgage pools in the first place. By committing to excessive foreclosure policies, banks reassure MBS investors and can attract more capital from them.
If the government prevents excessive foreclosure, the bank’s securitization process is hindered. Government policies that try to limit foreclosures can also reduce incentives for banks to screen mortgages diligently, leading to low-quality mortgages inclusion in MBS. This increases risks for investors and makes securitization more difficult.
Securitization is an important part of the financial market and crucial to the smooth functioning of bank lending. It is also being touted as a solution to broaden funding bases in Europe and USA, notably for SMEs, currently starved of liquidity to grow. Policies limiting foreclosure will inadvertently limit the scale that the banks can securitize and hence limit the scale in which banks can lend to the real estate sector. This translates into a loss for homeowners, small businesses, and the economy overall.
Property assessment has long been a solid industry with steady work for those willing to undertake the education and training required to enter the field. But that stability is changing thanks to automation. The number of appraisers is shrinking as software gets more accurate at valuing property and is increasingly integrated into the sale process.
The margin of error is decreasing as automation improves. Zillow offers a tool it calls Zestimate that uses input factors to determine the worth of a property. The Zestimate, which has been around since the website’s inception in 2006, cannot be considered an official, certified appraisal. But it’s a start. It’s also getting better as the company pours more resources into research and development.
Back when Zillow launched, they put in about 43 million homes and had a median error rate of close to 14%. Today, Zillow values about 100 million homes every single night and our error rate is down to 4.3%. So, Zillow has made a lot of advances in the accuracy of valuing homes. Zillow is pushing for even greater precision. The company is offering a monetary prize for its teams that can get the algorithm’s error rate down to 2% or 3%.
Computerized models are going to get very accurate, although in the end there’s probably some role for human beings to be involved there. The question is, what is that role of that human being? Right now, appraisers are professionals. They have a high degree of discretion, and there’s a bit of an art to what they do. In the future, there is a role to make sure that the facts the computer is using are accurate, but that’s more of a technician type job as opposed to professional.
Zillow is improving virtual assessment methods and automation is an undeniably growing part of the industry. It’s only a matter of time until the technology is strong enough and cheap enough, from the standpoint of the lenders and the buyers, to cut out the humans from this process and move to more of an algorithm-based process.
Buying a home is a relatively infrequent transaction for the average American, so individuals have limited expertise in the valuation process. That’s where the professional appraiser comes in. He makes a reasonable assessment by examining a set of comparable properties nearby and making adjustments based on the finishes and other elements of the home.
If I see a sofa on Craigslist; I don’t hire an external appraiser to argue about whether it’s worth $100 or $200. But in this case, there’s a third party with money at stake, and that’s the lender or the investors. They want to make sure that their investment is appropriate and the value of the house is appropriate for the transaction. Still, even the most professional appraisers are vulnerable to the forces of the real estate market.
One of the things we observed during the housing boom was a lot of pressure on appraisers to hit various prices, so the incentive problems there are really deeply entrenched. The deck is already stacked to hit a certain appraisal number. That’s really problematic and can also lead to a driving up of house prices. All of these things are pointing towards the potential for technology to play a really important and potentially beneficial role.
As comparable properties sell for higher and higher prices, the pressure on the appraiser increases. An appraiser who wants to hold the line on the price of a property runs the risk of not getting subsequent business.
There have been a number of layers of regulation put into place to block that type of behavior where you’re shooting for a particular number. But it is the case that the historical appraisal process led to the risk of being gamed and the risk of ratcheting up prices.
There are countervailing incentives in the process. If you look at appraisal accuracy over a long period of time, 90% of the time appraisals come in above the purchase of sale agreement. That leads you to believe there’s confirmation bias there, that appraisers are not individually valuing that home but justifying the price that’s already been agreed to. Normally, that doesn’t get you into that much trouble because home prices are increasing.
However, the 2008 recession and real estate market collapse illuminated the problem of inflated home prices. The experts said automated appraisals could help take some of the air out of the balloon.
The work of property assessment is transitioning from an art to a science. Most states require appraisers to have a college degree, complete an apprenticeship and have ongoing training. Extensive licensing is usually required. The industry has seen a decline of about 25,000 appraisers in the last decade, from about 120,000 to 95,000.
As you begin to see the writing on the wall, why start on this treadmill? Why begin on this long process of being approved for an industry when there is relatively limited future growth? That’s really thinned out the pipeline of people who want to get into the appraisal business.
There is irony in the formidable licensing requirement, which creates a barrier to entry for new people but drives up wages for those who stay the course. It’s not leading to folks trying to find an alternative to them.
Fannie Mae and Freddie Mac are already experimenting with some automation, which will undoubtedly continue. Perhaps the future role of the appraiser will be as an arbitrator who offers a human check-and-balance to an automated system.
What’s the role of the appraiser going to be moving forward? Is this industry essentially doomed, or are they going to be playing a much smaller role? Whether the licensing barriers make sense as that transition occurs is something states are going to have to grapple with.
Before automation supplants human appraisals, a cultural shift must occur. The current appraisal process is very binary for a lender, who wants the assessment to match the sale price exactly. But an automated valuation model (AVM) would mean thinking about the assessment in terms of a range.
Is the sale price in the range that the model came up with? If you’re willing to trust a range, then a home could have that appraisal done in advance of the purchase of sale being agreed to. Right now, if the AVM comes in at 98 and the purchase of sale agreement is 100, that creates a problem.
Global housing stock has not expanded quickly enough to keep up with a surge in demand, but cities can focus on three supply-side solutions to make progress. One feeling unites billions of people in cities around the world: a sense of sticker shock whenever they attempt to find a new home. From London to Lagos, housing costs are creating financial stress for a large share of the world’s urban residents. Rents and home prices have risen far faster than incomes in most countries, particularly in big cities, where many people want to live and where job opportunities are concentrated. The issue affects everyone from slum residents living on the margins to middle-income households.
At the heart of the issue is an extreme imbalance in supply and demand. Population growth, the continuing trend toward urbanization, and rising global incomes are all fueling steady demand increases. In 1950, New York City and Tokyo were the only two cities on earth with populations of more than 10 million; today there are more than 20 cities of that size. The world’s urban population has been rising by an average of 65 million people a year over the last three decades, led by breakneck urbanization in China and India.
The housing stock of expensive urban centers around the world has not expanded quickly enough to keep up with this surge in demand. Research from the McKinsey Global Institute has examined the scope of the housing affordability gap. California, for instance, added 544,000 households but only 467,000 net housing units from 2009 to 2014. Its cumulative housing shortfall has expanded to two million units. With home prices and rents hitting all-time highs, nearly half of the state’s households struggle to afford housing in their local market. In New York City, MGI estimates that 1.5 million households cannot afford the cost of what we define as a decent apartment at market rates. This puts the city’s total “affordability gap” at $18 billion a year, or 4 percent of the city’s GDP. As London’s economy has boomed over the past two decades, the city’s annual home completions increased by just over 10 percent, falling far short of demand and driving home prices five times higher.
Worldwide, MGI has estimated that some 330 million urban households currently live in substandard housing or stretch to pay housing costs that exceed 30 percent of their income. This number could rise to 440 million households by 2025 if current trends are not reversed. Beyond the human toll, this issue eventually constrains economic growth. Investment in housing construction remains below its potential, and households with a disproportionate share of monthly income going toward rent or mortgage payments have to limit other forms of consumption. Returning to our example in California, MGI estimates that the housing shortage causes the state to lose $140 billion in annual output, or 6 percent of state GDP.
The legitimate interests of investors, particularly in a low-interest-rate environment, can add fuel to the fire. Foreign capital flocks into global hubs, and residents feel compelled to leverage up to achieve home ownership or add hard assets that are appreciating in price. In the hottest markets, these trends are sometimes amplified by speculative behavior, such as land hoarding or fast-paced property flipping.
Some governments have taken steps to cool real-estate markets that are overheated by investors. These approaches include China’s move to discourage land hoarding by imposing a tax on idle land, Switzerland’s addition of taxes on value gain and limits on foreign- and second-home ownership, Canada’s recent imposition of stress tests for home loans and tighter rules for mortgage insurance, and Germany’s limits on loan-to-value financing ratios. These types of measures work best when they are complemented by flourishing rental markets that allow average citizens to save for down payments without facing a shortage of housing options.
National and local governments around the world often address housing gaps by focusing on demand and financing. Strategies such as housing subsidies, privileged financing, or various forms of rent control offer much-needed relief to the low-income households they cover, and they are legitimate policy choices if carefully designed. But they are expensive and difficult to sustain—and they do not address the core issue of an underlying housing shortfall.
It will take a dramatic increase in the number of available housing units to achieve greater affordability. Of course, the simplicity of this statement belies the complexity of executing it. Because progress has been so elusive, this briefing note will focus solely on supply-side solutions, addressing three challenges that all cities have in common: making land available, removing barriers, and making the construction sector more productive.
Access to land is typically the biggest constraint for housing development and one of the major drivers of cost. In places such as Auckland and Rio de Janeiro, the cost of land often exceeds 40 percent of total property prices. In extreme cases such as San Francisco, land is so scarce that it can account for as much as 80 percent of a home’s price. Globally, we estimate that unlocking land to the fullest extent could reduce the cost of owning a standard housing unit by up to 20 percent. A comprehensive citywide mapping and inventory exercise can unearth many opportunities. Based on our past work in urban environments, we have identified seven areas of focus.
It is critical for congested cities to promote density around transit rather than encouraging sprawl and longer commutes. Transit-oriented development may involve redeveloping existing residential structures or encouraging new building by permitting higher floor-space ratios, loosening height restrictions, or allowing greater density in specific target zones. These zones can be selected to promote local objectives, such as reduced dependence on private vehicles or the development of mixed-use, pedestrian-friendly cityscapes. Places such as Hong Kong and Seoul have already intensified land use around transit stops. Seoul allows floor-area ratios that are up to 20 times higher in better-connected neighborhoods than in more distant areas. Other cities can follow this approach. Analysis in San Diego, for example, found that increasing the density of residential developments in a half-mile radius around public transport nodes could expand the city’s housing stock by close to 30 percent.
In many cases, cities may not even need to increase density thresholds. They can build out on residential parcels that are not taking advantage of currently allowed density. Sites that are underutilized can be identified as priorities for redevelopment. Incentives (such as expedited permitting, relief from parking requirements, or investment in public parking) can make these types of projects more attractive to developers. MGI’s analysis in Los Angeles found that 28 percent of parcels zoned for multifamily development are underutilized; maximizing them could add more than 300,000 units to the city’s housing stock.
Another strategy involves building infill housing on vacant parcels. Even dense neighborhoods may have empty lots that could serve as viable sites. A surprising amount of land sits idle in the face of a huge unmet housing demand. Our analysis finds, for example, that Riyadh, Saudi Arabia, has some 40 square kilometers that are zoned residential but are not being utilized, while about 40 percent of all zoned residential land within Nairobi is vacant. Taxes on idle land can create an incentive to build.
Where appropriate, governments can earmark unused public lands for housing development. Transit authorities may own property surrounding busy transport nodes. Decommissioned sports facilities, military bases, or transit hubs may also be viable sites. It is often easier to facilitate low- or middle-income housing on these types of sites than on typical residential parcels, since public authorities can make the transfer or sale of the land contingent on the development of affordable housing. They may even directly subcontract development of housing in these areas. Turkey’s Mass Housing Administration (TOKi) has managed to open up some 4,120 square kilometers of unused land (or 4 percent of total urban land) from other government agencies for housing development. San Diego could add roughly 4,000 housing units by converting disused sports facilities into mixed-use commercial and residential developments.
Some cities may have opportunities to convert light-industry sites. Large unused industrial parcels (such as shuttered factories) can offer tremendous development potential. But converting them to residential use should involve careful consideration of the impact on jobs and whether any commercial activity on surrounding sites would pose issues for residents.
Cities surrounded by undeveloped or agricultural land can invest in greenfield housing projects on their outskirts. Although greenfield developments typically involve building infrastructure, roads, and new neighborhoods, they may still be cheaper than infill projects if the land is more affordable and if there is room to achieve economies of scale on multiacre sites. Greenfield developments open up the possibility of building single-family homes, which are less feasible in dense urban cores. In California alone, we estimate that greenfield developments could provide more than 600,000 additional housing units. Despite their advantages, cities should learn from mistakes made in locations as diverse as Cairo and Mexico City; if greenfield developments are built too far from existing employment centers or transit hubs, they can fail to attract or retain residents.
Finally, many cities can encourage the owners of single-family homes to add accessory dwelling units. These may include garage apartments, basement apartments, or backyard cottages. It does not matter whether they house extended family or renters. Accessory dwelling units are inherently affordable because they use existing land, buildings, and infrastructure, resulting in a sort of “invisible density.” MGI’s research in California found that homeowners could add up to 790,000 housing units across the state from such structures.
Cities have to develop governance structures that represent all stakeholders (not just the most entrenched, powerful, or vocal) and streamline the actual execution. Several approaches can help. Housing strategies are enormously complex, involving initiatives and policies across financing, urban planning, infrastructure development, land-use regulation, building codes, delivery and contracting approaches, and more. But stakeholders from different parts of the system rarely work together to smooth friction and focus on the broader goal of getting more affordable housing built quickly.
The “delivery lab” model addresses this lack of coordination by bringing together 30 to 40 people across these specialties for fast-paced, intensive working events. Labs are designed to translate high-level housing strategies into detailed initiatives, implementation plans, and key performance indicators. In these settings, public- and private-sector stakeholders can address misperceptions and arrive at joint solutions. Labs can produce integrated plans that clarify expectations and synchronize timelines for what each player agrees to deliver. Getting the right people around the table is critical. Sessions should be well-facilitated, with consultation from external topic experts. Each stakeholder should be represented by someone with enough seniority to make quick decisions, and the top sponsor (for example, a city mayor) should personally attend and guide key sessions.
The delivery-lab approach has had a major positive impact on the housing market in Saudi Arabia. The government invited all stakeholders across the public sector (all ministries and government entities related to housing) and private sector (including representatives from real-estate developers and banks). Citizens’ voices were also heard through the use of social media and focus groups. These events took a multidisciplinary approach to identifying the key challenges in the housing sector and devising solutions with clear targets, implementation plans, accountability, and budgets. The labs have aligned stakeholders around high-impact ideas that take practical considerations into account.
To give just one example, the labs identified last-mile infrastructure connectivity as an issue that was delaying the development of large land parcels and creating uncertainty that deterred developers. Cross-disciplinary problem solving quickly came up with solutions, such as an infrastructure company focused on building these last-mile connections using a build-operate-transfer model.
The outcomes from successful labs are a good foundation, but actual implementation is crucial. A city government can accelerate progress by empowering an agency or unit with a mandate to guide housing delivery from end to end. This type of unit needs exceptional talent with good problem-solving skills, stakeholder-management and communication skills, and significant decision-making power or direct access to the top decision maker. San Diego’s Housing Commission, for instance, hires private-sector talent, has an in-house real-estate development team, and invests in marketing and communications.
Although most people agree in the abstract that increasing housing affordability would be a good thing, opposition often halts specific proposals. Existing residents may be concerned about the changing character of their neighborhood, the prospect of lower home values, congestion, and crowding in schools. To accommodate these concerns, many jurisdictions have established processes such as public hearings or ballot initiatives that carry veto power. While the intent to give the community a voice is noble, the result is often that very little housing gets built.
Cities need to take an inclusive approach to providing housing for people of all incomes, ages, and demographic groups. People who come to a city to work need to be able to find an affordable place to live there. But the voices of existing homeowners who want to preserve the status quo often drown out those of newcomers, young adults, low-income service workers, and renters who need more housing. After a 2009 audit found that neighborhood councils were not representative of the city’s broader population, Seattle replaced these bodies with a central Community Involvement Commission that includes mayoral and council appointees chosen to represent a broader set of stakeholders.
Cities can also mandate a larger role for employers in the community-input process. Companies have a very real stake in housing issues, since the availability of housing directly affects their ability to attract talent. Amid the extreme housing crunch throughout Silicon Valley, for example, Facebook has advanced plans for a mixed-use, mixed-income residential and commercial campus in Menlo Park.
While many cities hold public hearings and disclose minutes of meetings, there are ways to make the planning process more dynamic and inclusive. Widely distributed digital surveys and the use of analytic tools to track citizen sentiment and real-world use patterns can keep housing decisions more in tune with the actual needs of the community and lessen the influence of smaller entrenched interest groups. Creating an open-source map of all city parcels overlaid with development opportunities can foster debate about priorities. Tools such as Owlized can help residents visualize proposed projects in their neighborhood in 3-D.
A maze of regulation is typically associated with land acquisition, zoning, and building codes. In many jurisdictions, developers need to go through extensive environmental studies, design approvals, and public hearings. These safeguards are well-intended, but they can add inefficiencies. Wrongful manipulation of the approval process can result in multiyear delays and millions of dollars in added development costs. This increases the risk premium associated with building projects, driving up costs for renters and would-be homeowners and preventing some projects from being undertaken at all.
Cities can streamline their processes to fast-track land-use approval and permitting, creating a more predictable and less burdensome process. Establishing “single window” clearance (that is, consolidating approvals from multiple agencies into one clear interface) and digitizing permit applications and status tracking are clear places to start. Cities around the world, from Nairobi to Singapore, have had success with this approach. Simplifying the required permits can provide significant relief. Australia, for example, was able to cut the number of regulatory procedures and speed up permit approvals by more than two months, all while maintaining high construction quality.
Cities could consider establishing “by right” special development zones in select areas where deviations from city zoning and land-use codes are permitted with minimal review. Blanket environmental reviews could clear requirements for future developers in entire zones. Governments could also create appeal boards at the local level for faster resolution of project rejections or mitigation proposals.
Local governments can also bring a new approach to building codes. Today these codes tend to be highly prescriptive about the choice of equipment, materials, and designs that construction companies must use. This can stifle innovation and make it difficult to achieve meaningful improvements in productivity by adopting new practices. Instead, cities could opt for “outcome based” regulation that requires safe, sound results (such as structural integrity) but give construction companies the flexibility to decide how to achieve them.
Building projects on a larger scale can dramatically change the productivity and cost of delivering housing, making it possible to employ techniques such as repeatability and off-site fabrication. A number of companies take this approach while trying to incorporate design quality and variability as well as sustainability. Cities can support industry innovation by providing the land and infrastructure that allow for scale, tendering out city-scale developments, and consolidating high-volume demand.
Where cities themselves invest in housing or supporting infrastructure, contracts can be a powerful lever for raising construction productivity. In an MGI global survey, construction executives, suppliers, and project owners pointed to misaligned incentives and contracts as impediments. Projects are often awarded to the lowest bidder with limited regard to quality, change orders, and claims that might arise after the fact. The planning stage may be given short shrift, while overly detailed specifications can limit flexibility when problems arise. Risks are often misallocated, and contracts generally fail to take the inherent uncertainty of projects into account. Furthermore, relationships may be adversarial, creating an environment that lacks trust and genuine collaboration.
Moving to value-based tendering (which places greater emphasis on the quality and past performance of suppliers), adding contractor and owner incentives to traditional contracts, and making provisions to improve transparency and collaboration can deliver tremendous value. An even bolder approach involves contracts with an integrated project-delivery (IPD) model. When arrangements with multiple contractors are transactional, they can easily turn hostile. But the IPD model encourages multiple stakeholders to collaborate closely on a project, sharing its profits or losses while maintaining their separate business identities. Tired of missed deadlines and budget overruns on early projects, Sutter Health, a not-for-profit health system with dozens of medical centers, took this approach to tighten up its $7 billion capital-improvement project. The company designed an IPD model, assigning contracts to integrated teams of designers, consultants, and builders rather than to individual parties. The new approach has yielded projects that came in on time and under budget.
Finally, by mandating use of efficient technologies and innovations in their procurement contracts, cities can hasten private-sector adoption and investment in cost-saving tools. Requiring contractors to submit models in building-information-modeling (BIM) software, which has a track record of fewer errors and reduced rework, can solidify better industry standards and practices.
Even when land is available and there is no community opposition, construction itself poses risks. Too many projects come in late, over budget, or fraught with problems. Productivity within the construction sector is consistently poor around the world. Labor productivity growth averaged 1.0 percent a year over the past two decades, compared with 2.8 percent for the total world economy and 3.6 percent for manufacturing. The picture is particularly dismal in advanced economies. In the United States, for instance, labor productivity as measured today is lower than it was half a century ago.
Some of this is due to external factors such as cumbersome building codes and permitting processes as well as cyclical swings in public and private demand. Informality and corruption sometimes distort the market. At the industry level, construction is highly fragmented, contracts have misaligned incentives, and inexperienced owners and buyers find it hard to navigate an opaque marketplace. At the company level, we often see poor project management, inadequate design processes, and a lack of investment in technology, R&D, and workforce skills.
While cities can create a more efficient environment and incentives for innovation, construction companies also have to up their game. The best-performing companies take a value-engineering approach to the design process, pushing for repeatable design elements whenever possible. They also avoid delays by focusing on procurement and supply-chain management for just-in-time delivery.
Several approaches can improve on-site execution, starting with a rigorous planning process and the completion of all prework before starting on-site. To ensure that key activities are achieved on time and on budget, companies should agree on key performance indicators, particularly for subcontractors, and hold regular performance meetings to monitor progress and solve issues. It takes careful planning and coordination of different disciplines on-site along with the application of lean principles to reduce waste and rework.
The construction industry also needs to accelerate digital adoption. This includes the use of BIM tools for design as well as analytics and the Internet of Things for on-site monitoring of materials, labor, and equipment productivity. Cloud-based control towers can coordinate large-scale, complex projects, assembling data in near real time that is both backward-looking and predictive. They can keep information flowing to owners, contractors, and subcontractors. Techniques and data that are readily available today can produce large improvements in the accuracy of cost and schedule estimates as well as engineering productivity. Advanced automated equipment, such as bricklaying and tiling robots, can accelerate on-site execution. MGI’s productivity survey indicated that the biggest barriers to innovation by construction companies are underinvestment in technology and a lack of R&D.
Construction is almost always approached as a series of discrete and bespoke projects. But the biggest boost in productivity comes with the concept of a manufacturing-inspired mass-production system. This involves more standardized elements, panels manufactured and assembled off-site, and limited finishing work conducted on-site.
Barcelona Housing Systems, for instance, has improved productivity by up to tenfold by moving away from traditional on-site construction to large-scale industrial delivery and prefabrication. The company aims to develop more than 10,000 housing units per project, helping to amortize the cost of manufacturing facilities. It uses a replicable design of four-story multifamily buildings that mix housing, retail, and service-oriented office space, varying some facade and design elements without changes to the structural design. All necessary housing components are assembled from prefabricated modules built in a factory on-site or nearby, and the components are simple enough to be built by nonskilled workers with minimal training.
VBHC, a modular-housing provider from India, designs prefabricated room components that can easily convert one-bedroom units to two- or three-bedroom units, saving costs by avoiding extra aluminum frameworks. Such construction techniques can be applied in a variety of different housing contexts, including prefabricated single-family homes as well as detached dwelling units and modules for multifamily infill projects.
Modular-home construction is also gaining traction in the United Kingdom. A company called Legal & General, for instance, is building one of the largest modular production facilities in the world near Leeds, where it expects to produce up to 4,000 units a year. The £3 billion UK Home Building Fund explicitly calls for and supports the funding of such techniques.
US-based Katerra uses modular-construction techniques while delivering construction services to customers in an end-to-end model. The Silicon Valley start-up takes sole responsibility for design, sourcing materials from a global supply chain, and assembling final products. The company is focused on using new building materials and finding process improvements by deploying the Internet of Things.
Other technology breakthroughs are being applied as well. Shanghai-based WinSun automates construction through 3-D printing. Although relatively new, the technique has already been used in a few cities: Saudi Arabia has signed a contact with WinSun to develop 30 million square meters of real estate, on the heels of the company’s development of a 3-D-printed office building in Dubai.
Finding an affordable place to call home has become an issue for citizens around the world. Subsidies and financing solutions alone cannot close the gap. Cities urgently need to ramp up home building to improve residents’ quality of life, remain inclusive, and ensure that housing shortages do not become a drag on economic growth. The tools and strategies outlined here can be pursued in parallel—and given the extent of unmet demand today, there is no time to lose.