Property investing in the face of changing demographics

You may ask, why bother with something as boring as demographics.

It’s simple really, the property market, just like any free market is driven by economics, by supply and demand. And as an investor you can work on the supply side of the equation, but there is precious little you can do about demand. You can however do your utmost to understand what the demand is now and how it is likely to change over time so that when you offer a property on the market, be it for rent or for sale, it will be something that people actually want. Ensuring your investments are in demand is ensuring your investments will get a good price in the market. In short, a little knowledge on demographics can make you money.

The problem is what people want now is likely to change and demographics combined with certain social trends can give us some helpful insights into what the future might hold.

Before we look at what demographic trends are developing in Australia’s society and how they might impact the property market we need to get some definitions cleared up. Most of us will have heard the phrases Baby Boomers, Generation X, Generation Y, but do you actually know which age groups they refer to? And what values these groups typically hold?

Just in case you don’t, here is simplified summary of the key generations. Please note that many slightly different years are used for the grouping of generations, here I have deferred to those used by Bernard Salt (Australia’s leading demographer and author of several books on the subject):

• Baby-boomers: this generation was born during the post World War II baby boom between 1946 and 1961. And I mean baby BOOM. In the United States 76 million babies were born into this generation, which is 10 million more than during the following generation. Not only is it a large demographic group, it is also an influential group as boomers control the wealth of most if not all western countries. It was estimated that in the year 2004 the baby boomers in the UK held 80% of the country’s wealth – similar percentages would hold in other Australia or the US. And soon these baby boomers will start retiring and they will change how they live, where they live, how they invest their money and what they spend it on.
  

• Generation X: this is the generation born between 1961 and 1976 and I am one of them, a quarter of the Australian population belongs to Generation X. A generation too young for the moon landing, the 1970s oil crisis or black and white TV, a generation which has grown up in an unstable world with unstable families (increasing divorce trend) and loss of permanency in the workplace.
  

• Generation Y: those born between 1976 and 1991. Often a single child of baby boomer parents who grew up in prosperous times. Many still live at home with mum & dad and remain uncommitted in their 20s to marriage, mortgage, children or careers. Y’ers hold different views on loyalty to friends, to workmates or to employers and tend to prefer ‘deals’ rather than contracts and ‘mentors’ to bosses. Highly educated, opportunistic and global in their thinking.
  

• Generation Z: the generation born between 1991 and 2006, also know as the Internet Generation. This is the generation my kids belong too and for the next 1 to 2 decades they will not have much influence on the property market so let’s leave them out of the picture for now.
  

A good comparison table shown by Bernard Salt in his keynote speech “Mapping the future — Australia’s consumer demographics” to the 2007 National Consumer Congress is shown below highlights the differences in generational traits between boomers, Gen X and Gen Y.

As property investors we need to take a look at this and try to understand what that would mean for the property market in terms of types property likely to be in demand, areas that will become or remain in demand, what this does to household size and the longer term trend to homeownership.

We can already see number of trends emerging from this generational shift for exampled Gen Y looks for inner city living typically in medium density housing projects close to lifestyle precincts, resulting in revitalization of many previously unwanted inner city suburbs. In addition, Gen Y are unlikely to commit to a mortgage and prefer to rent continuing the long term trend of lower homeownership (see the table below).

Now that we have a better idea of the various generational groups on how they may impact the demand for property, lets have a look at what the population data from the Australian Bureau of Statistics (ABS) can tell us.

Australia’s population is booming

Let’s start with the overall population growth first. Mid 2008 the ABS released its latest population projections which highlight strong population growth as can be seen in the graph below.

In the graph, the sold black line represents the historical population in Australia with the three solid colored lines representing the ABS forecasts for the three different scenarios (series A, B and C). Similarly the dashed line represents the historical population growth and the three thin colored lines the assumed population growth for each of the three scenarios.

The three scenarios identified as Series A, B or C are based on a different set of assumptions for population growth factors like net migration, birth rate and life expectancy as follows:

• Series A: assumes the TFR will reach 2.0 babies per woman by 2021 and then remain constant, life expectancy at birth will continue to increase until 2056 (reaching 93.9 years for males and 96.1 years for females), NOM will reach 220,000 by 2011 and then remain constant, and large interstate migration flows.
• Series B: assumes the TFR will decrease to 1.8 babies per woman by 2021 and then remain constant, life expectancy at birth will continue to increase each year until 2056, though at a declining rate (reaching 85.0 years for males and 88.0 years for females), NOM will remain constant at 180,000 per year throughout the projection period, and medium interstate migration flows.
• Series C: assumes the TFR will decrease to 1.6 babies per woman by 2021 and then remain constant, life expectancy at birth will continue to increase each year until 2056, though at a declining rate (reaching 85.0 years for males and 88.0 years for females), NOM will reach 140,000 per year by 2011 and then remain constant, and small interstate migration flows.
  

The base case scenario (Series B) suggests that the current population of 21.5 million will grow to about 34 million people by the year 2050 and to just under 45 million people by the year 2100. That would mean that in the next 40 odd years Australia would come to house another 12.5 million people, the majority of which will choose to life in and around the capital cities.

Queensland is the winner

According to ABS population estimates New South Wales has the greatest population of all Australian states, accounting for one third of all persons followed by, Victoria (25%), Queensland (20%), Western Australia (10%), South Australia (7%), Tasmania (2%), Australia Capital Territory (2%) and Northern Territory (1%).

The projections suggest that by the middle of the century, the portion of total Australian population by state will change significantly. Although New South Wales will still be home to the greatest number of residents, it is projected that the state will only have 29% of all Australian residents compared with the 33% it currently houses.

In contrast, by then Queensland will be the second most populous state and will house one quarter of all Australian residents compared to 24% of all residents which are projected to live in Victoria. Queensland is projected to overtake Victoria as the second most populous state in 2050. Western Australia’s portion of the Australian population is also projected to increase with its population growing from 10% of the total Australian population as of now to 12% of the total population by 2050.

Australian capital cities will record an increase in population by some 10.4 million people persons and be home to 23.5 million persons – that means 67% of all Australian residents will live in a capital city area compared to an estimated 63.6% currently. The population growth within capital cities of 1.2% equates to significant demand for housing. In order to cater for this projected growth, significant densification of capital city areas will be required, which is likely to be achieved through higher density forms of housing.

Melbourne is the capital city, which is projected to see the greatest increase in population between 2007 and 2056 with the population expected to increase by almost 3 million persons.

Combine this with the trend from the last 30 or so years as shown in the slide below:

Capital Cities

In Series B all capital cities are projected to increase their share of their respective state or territory population over the next 50 years. By 2056 Melbourne, Perth and Adelaide will have the largest shares, with 80% of all Victorians living in Melbourne (73% in 2007), 78% of Western Australians living in Perth (74% in 2007), and 75% of South Australians living in Adelaide (73% in 2007). Hobart will experience the largest gain in share, increasing by 7 percentage points to 49% of Tasmania's population in 2056 (from 42% in2007). Brisbane will experience the smallest gain, increasing to 46% (from 44% in 2007). Sydney's share of New South Wales' population is projected to increase to 68% in 2056(from 63% in 2007) while the Darwin's share is projected to increase to 61% (from 55%in 2007). Conversely, each balance of state/territory's share will decrease over the period 30 June2007 to 2056. The populations of the balances of Queensland and Tasmania will remain larger than their respective capital cities, with 55% and 51% of their state's population respectively.

Potential workforce

The potential workforce is the number of people in the population of workforce age, which is usually defined as 15–64 year olds. The actual workforce will depend on the proportion of 15–64 years olds that seek to actively participate in the workforce and those 65 and over who continue to work.

In recent years Australia's potential workforce has been growing by over 200,000 people each year. At June 2008, the number of people of workforce age was 14.2 million people (67.5 per cent of the population). The three different ABS series show quite different outcomes in the number of people aged 15 – 64 (see figure below).



For example series A shows continued strong growth in Australia’s potential workforce to 2101, whereas series C shows very little growth at all.

People not in the workforce are generally less likely to be paying taxes and are more likely to be dependent on pensions and other forms of government support. Therefore another useful measure is to compare Australia’s potential workforce against Australia’s total population. This analysis shows similar trends for all three ABS series, with the proportion in the 15-64 year age-range steadily declining from 67 per cent in 2008 to between 59 and 61 per cent in 2051 and between 56 and 59 per cent in 2101.

Population Ageing

These population show that the ageing of our population will continue. This is the inevitable result of fertility remaining at low levels over a long period and increasing life expectancy. In 2008, around 13 per cent of Australia's population was aged 65 and over, by 2050 this figure is expected to be between 22% and 24% - slowly increasing to between 25 and 28 per cent by 2100.

This will have a dramatic effect on the population, but also on the type of services and real estate that will be in demand, just look at the graph below which shows the age group 65+ in millions of people:

Household Size and Formation

The significant growth of persons in the 65+-age bracket is an important phenomenon for future housing demand. Persons in this age category are more likely to live either alone or in a couple, contributing to a decline in average household sizes. Also, this age group represents the greatest demand for lifestyle and retirement properties, as such, demand for developments catering specifically for this target market will become more common.

A further increase in the number of people living alone over the next 20 years will be as a result of people delaying marriage (Gen Y) and an expected increase in divorce and separation.

In the 2001 Census, there were 1.8 million Australians living alone. This figure is projected to blow out to between 2.8 million and 3.7 million, taking into account factors such as fertility rates, migration and life expectancy.

So What

So what do these population changes mean for housing? Although confidence is currently low and there are few buyers and lots of sellers, the projected rate of population growth suggests that ongoing demand for housing will continue to be strong.

Based on supply fundamentals increasing demand for housing, stock is likely to translate into future pressure on housing prices.

One of the fundamental issues associated with population growth is ensuring appropriate levels of infrastructure, including transport, health care and schools are planned for and rolled out strategically. Planning and development of this infrastructure should precede or at the very least run in parallel with population growth rather than follow it, as has often been the case in the past. This is particularly essential for new affordable housing options being developed in the outskirts of the nations metro areas. It is these areas where commute times and costs make affordable housing an undesirable option for most of the market.

In what to invest?

Obviously Gen Y will provide the lion’s share of rental demand, followed by Gen X and then not a lot of rental demand from the baby boomers. But what type of property do these demographic groups require?

Matusik says, “If I was an investor and I was particularly looking for stronger cash flow – better rents and more consistent rents – or weigh that up against buying a house on a 900 square metre block of land in the outlying areas – you’d be looking to buy an apartment or the like. And you’d look for one that could accommodate more than one demographic type.”

“So you may buy a one-bedroom apartment and I believe there’s an argument for smaller apartments of, say, less than 50 square metre product, so that someone living alone can actually afford it in the future, paying $300 or $400 a week and be able to afford it. But you’ll find that the best apartments which have gone up in price and particularly in rent are two-bedroom, two bathroom apartments that are designed for two couples, a couple and a single, or two lone persons.”

Furthermore, Terry Ryder from www.Hotspotting.com.au wrote the following in a December 2008 article titled “Gen Y will spark real estate revolution”:

Australia is on the cusp of a “real estate revolution”, according to Colliers International. Its residential research director Jonathan Rivera says the emergence of Generation Y homebuyers is a demographic shift that can’t be ignored. “Within a few years, Gen Y is tipped to inspire great change across residential landscapes,” Rivera says. “They will comprise the most influential generational group in property since the baby boomers.”

He says there are 5.5 million Gen Ys - that’s 200,000 more than Baby Boomers and 700,000 more than Generation X.

“Gen Y people are very accepting of density and the majority believe they do not have to move to the suburbs once they have kids,” Rivera says. “They are interested in close-knit neighbourhoods. They like to belong or identify themselves in relation to where they live.”

“Our findings have shown they are seeking ‘destination developments’ where connectivity is key.” Compact urban developments in middle-ring suburbs (5-15km from the CBD) with strong social and amenity networks will be the future if developers wanted to tap into the $48 billion spending power of Gen Ys.

“We’ll see a greater shift of Gen Y toward home ownership in 2011 and 2012,” Rivera says. “Half a million of these Gen Ys earn at least $1000 a week.”

He says Gen Y is outward-looking and civic-minded and will want these values to extend into the corporate structure of their builder or developer. “They’re looking for diversity in the form of clustered single family dwellings, townhomes and apartments,” he says. “Developers should be offering location-driven housing of reduced product size but with a bigger focus on design and layout.”

“Opportunities lie in middle-ring suburban infill and Greenfield sites.”

Gen Y buyers will be drawn to developments with unique features like a roof-top common area instead of a penthouse in Queensland or “fire pit” in the colder states where residents can meet.

“They are the most connected generation in our history and place high value on staying connected with friends and family,” Rivera says. “Creating density with space are the characteristics needed to support this lifestyle.”

In Summary

• Between now and 2101, Australia’s population is expected to grow from some 21.5 million persons to 44.5 million people
• By 2051, people aged over 65 years will number between seven and nine million.
• The number of workers (from 15 to 64 years) is expected to fall from 67 per cent (in 2004) to between 57 and 59 per cent by 2051.
• In 2001 there were 1.8 million Australians living alone. This will be between 2.8 million and 3.7 million by 2051.
• Gen Y will have a major impact on the property market, with very different demands on housing.
• A large proportion of Gen Y will still be forced to rent.

Sources:
ABS Population Projections 2006-2100
“Mapping the future — Australia’s consumer demographics” presentation by Bernard Salt at 2007 National Consumer Congress