The end of population growth?
Welcome to this week’s blog. If you’d prefer, access the audio version.
The next 20 years hold considerable uncertainty. The combined forces of rapid technological advancement and an undercurrent of social change pose both headaches and excitement for those looking to predict the future. Thankfully, some other economic drivers are much more predictable and glacial. Take population growth as an example – an ever-inching upwards crawl that you could bet the farm on. ‘Wait, what? The UK population may have fallen by 1 million people over the course of the past year?!’ In today’s blog, I unpack this extraordinary statistic and question what new population drivers might mean for the future of real estate.
At a global level, the population has increased every year since 1350. In case you were wondering, this was the year that the Black Death ravaged the world. The same does not hold true when assessed at a country level, because extreme events are more likely to skew country level data. For instance, in the UK the population fell twice in the past 100 years. Firstly in 1915-18 during World War 1, and secondly in 1940-42 during World War 2. In both cases the population fall was attributable to an increase in excess deaths. However, population at a global level continued to grow during both periods. This is because, despite being ‘world wars’, most of the global population was in fact unaffected even though a small number of countries (particularly Russia / the Soviet Union, China and Germany) were disproportionately affected. The trend was therefore not globally synchronous.
Before we dive into the events of 2020, let’s first briefly establish the drivers of population change. They’re quite simple. At a global level, this is driven by the excess of, on the one hand, births, and on the other hand deaths. At a local level we need to add in the factors of immigration and emigration to arrive at a complete picture. Therefore, population change = births + immigration – deaths – emigration. Now let’s look at how these four factors were impacted in the UK in 2020, starting with immigration:
Immigration is the inflow of people from other countries. In any given year, immigration to the UK is about 600,000. The main reasons for immigration into the UK are cited as work and study. A third, less material reason, is to join family. The breakdown is important. For people coming from EU countries the large majority – 60-70% – has typically been for work and ~20% for study; whereas of the people coming from non-EU countries (more than 60% of all migrants), about 50% come to study, 25% come to work and 25% come to join family. Importantly, study tends to be short term and balanced with corresponding emigration, whereas work might prove a permanent decision. Furthermore, most non-EU migrants, particularly students, have time-limits attached to their right to remain. Meanwhile, until this year, EU workers had a permanent right to remain, regardless of the reason for coming here. In 2020 immigration to the UK fell by an estimated ~40%. Why? We can’t be sure; however, Brexit has certainly acted as a disincentive or actual barrier, while coronavirus has significantly reduced mobility globally and distorted statistical analysis. It remains to be seen whether some of the anticipated 2020 reduction becomes permanent.
What about emigration? Historically emigration has been less than immigration (typically 300,000 pa), creating a net surplus. A significant chunk of emigrants in any given year (about half) are returning immigrants. This might for instance occur when the reason for immigration (e.g. period of study, specific job) ends. It might also occur when the economic conditions favour a return. For instance, emigration from the UK reached a peak in 2008 (~400,000) during the Great Recession, when among others things the value of sterling weakened and businesses shed jobs. Last year, COVID-19 is thought to have significantly accelerated returners. Of British citizens emigrating, reasons cited include: (1) work (typically skilled individuals pursuing careers), (2) lifestyle (with a high skew towards retirees), (3) to be with family (often driven by marriage to a foreigner), or (4) the now ubiquitous extended gap year. The first two of these reasons are the biggest drivers, and there are clear demographic skews in this data towards the economically advantaged and the old. As workforces become more international in the future, and particularly if work and life can be disconnected in the way described in my previous post, we are likely to see an increase in migration, as individuals seek out countries with higher liveability scores.
For these reasons the net balance of migration is starting to soften, and it is quite conceivable that in the future, this might reverse. But what about natural population growth factors:
The subject of excess death has been regrettably a topic of discussion in the past year. In an average year ~530,000 people die in the UK. COVID-19 led to a significant increase in deaths in 2020, rising to about 610,000. This is the highest figure since 1918. Even when we adjust for population size, this is the highest increase in deaths since 1940. It is worth noting that this bucks the trend. Deaths have been consistently reducing for more than a century as better healthcare is leading to increased longevity. It remains to be seen whether an endemic COVID will change this; however, there are good reasons to hope that this will not be the case.
Perhaps most interesting is the birth rate. About 700,000 people were born in 2019. To ensure that the population remains even in the long run, a country needs to sustain a fertility rate of 2.1 children, (it needs to be greater than two, because some people will not survive into adulthood). 2020 was the eighth consecutive year in which the UK fertility rate has dropped. It now sits around 1.6 (compared with 2.8 in 1965 and 1.9 in 2010). This is attributable to a number of factors; the most significant being choice. Over a long horizon, contraception has played a key role. However, more recently, a decision to prioritise careers and lifestyles, (in some cases informed by the ever later achievement of financial independence) is leading a deferral of having children, which in itself carries a risk of infertility among women. Not only this, and a little alarmingly, the male fertility rate in the West is falling due to increased obesity, exposure to chemicals, plastics and other lifestyle factors. Some believe that one day this might lead to global extinction. Either way, the birth rate is falling, and could very soon reverse natural population growth.
So to recap on the broad sizing of things in a typical year: 600,000 immigrants + 700,000 births – 300,000 emigrants – 600,000 deaths = positive population growth; but it’s easy to see how this could change. The factors that are leading economists at King’s College University to predict a total fall of 1 million for 2020 are likely: (1) temporary, and (2) due to coronavirus related anomalies in the 2021 census data collection process. However, we are undoubtedly at a tipping point for global population growth. Since the 1970s the growth rate has been shallowing, and for the first time, forecasters believe that the path ahead could be negative. And this is already happening around the world. Japan’s population has been falling for 10 years and Italy’s appears to have peaked. By the year 2100, the population of both of these countries, along with 21 others, is estimated to halve its current number,. The chances are that the population of the UK will be under significant downward pressure over the same period, with forecasts hinting at a peak of 75 million in the 2040s.
Why does this matter? Population is a big driver of economic growth and a huge driver of the property industry. We develop property for one of three reasons: (1) to cater for population (hence employment) expansion, (2) physical obsolescence (the need to replace a building due to deterioration), and (3) economic obsolescence (the need to replace a building with something new, because the old one now lacks modern purpose). Commercial real estate is significantly affected by the final category with shorter product lifecycles, but for housing (which tends to survive both economic and physical obsolescence for hundreds of years), the population growth is a big deal. One could argue that we need a resetting of demand for housing to keep up with the significant undersupply and work our way out of the housing crisis. Others will point to the sustainability benefits that a flat or declining population might have for our planet and the sustainability of resources.
What about the nuances? If immigration slows down, what might this mean? The three largest migrant groups in the UK are from (1) India, (2) Poland and (3) Pakistan. A blanket slowdown in immigration would stabilise the existing ethnic mix of the UK. However, it might not work like that. If the slowdown of migration is more Brexit related and is coupled with a corresponding increase in repatriation among EU citizens, then the UK is likely to look less European in the future. Poland, Ireland and Germany are currently significant contributors to UK immigration – will this be sustained? How might this change the UK culture and labour market?
Secondly, a reduction in migration would skew the age pyramid. The age distribution of migrants to the UK looks nothing like the total UK distribution. Immigrants are significantly weighted to those in the 20s; in fact ~80% are under 30, compared with an average age of 42 for emigrants. Fewer migrants will make the UK older. This will be accelerated further if we start to see emigration among younger groups due to new work models. However, the bigger contributing factor will be the continuing increased age at death combined with the reducing number of births. What will this do to leisure, amenity and pensions in the UK? What would the new retirement age need to be?
A third factor associated with reduced migration is city level population change. A disproportionate 35% of migrants end up in London, and the significant majority find themselves in the UK’s other top cities. A reduction in migration would start to ease the population growth pressure on these big cities and slow the rate of urbanisation. Furthermore, without migration, the population of Wales and Scotland would already be reducing. How might this rebalance the geography of the UK?
In summary… when even the boring and predictable drivers of real estate like population growth become uncertain, you know that we’re in for an interesting time ahead. Whereas chartists like long straight lines extending interminably into the future, that isn’t the likely trajectory for many value drivers in the next 20 years. As always, the key to creating value from real estate is to have a really clear idea of who the customers of the future are likely to be and to build a proposition around them. It is increasingly no longer good enough to deliver something average and hope that underlying growth factors will bail you out. In a world where the future population might be less than the current population, developers and investors will need to be ever more fixated on capturing share through precise matching of customer needs, rather than putting their chips on ever rising structural tilts.