Tuesday 04 July 2017 by Opinion

Immigration, population growth and investing for the future

We love a sunburnt country, a land of sweeping plains, of ragged mountain ranges and population gains

Uluru, Australia

Immigration is essential to growth in many countries, Australia included. Without it we face declining populations, lower growth, inflation and years of very low interest rates.

Australia has had two massive waves of immigration over the past 70 years. First it was Europeans looking for a more prosperous future for their families; second was the recent wave of immigrants that aren’t necessarily seeking prosperity – most just seek a safer and healthier life.  Another major difference is that many are arriving single and often during university years, staying on to work and then start a family. These are the ideal immigrations in terms of economics – educated, income earners, family builders.

Figure 1 – Population growth and long term economic growth

Source: UN

The world’s population is aging as economic and health standards rise. The balance of working age populations and retired populations has impacted government budgets, placing the burden back on the shrinking working age population. While retirement ages will probably rise and slightly offset this trend, a shrinking global birth rate and increased movement of populations means that some economies will wind up being permanently degraded.

Imagine losing 20% of the population in your community – the empty houses, shops that can’t stay in business, community facilities that have to close. Now imagine that over an entire country like Japan or Germany. That’s what the next 50 years looks like for many countries.

Japan and Europe have this issue and it is already having a severe impact on economic growth and their prospects.  Japan’s population peaked in 2010 at 128.1m, and has since lost around 260,000 people a year. Approximately 27% of its population is over 65. The OECD estimates that this falling population is already costing the Japanese economy around 0.5%pa in GDP growth, which will rise to 0.9%pa by 2025. 

Japan has significant constraints on immigration. In 2015, its government stated that they will not be changing, but instead rely upon a rise in fertility rates from 1.4 to 1.8 to stabilise the population at 100m. No Japanese government has ever successfully increased its fertility rate. 

Similar issues exist across Europe. Immigration in Europe is more acceptable than in Japan, but still politically challenging.  Birth rates are extremely low in some countries – in some cases, the total number of births are lower than any time since the 1500s. Germany’s population peaked last year, despite its relatively open migration policies.  Italy is shrinking about the same pace as Japan. Overall, Europe is in decline due to a low birth rate and insufficient net migration.

When it comes to countries like Australia, – which has higher birth rates and net immigration – the impact on populations and its economic prospects is obvious as shown in Figure 1.  Migration increases the Australian population by 16-18% over the next 30 years, without it we would see very little change as our birth rates are barely high enough to maintain growth.

Implications for investment markets

The most significant impacts will be on property prices and inflation. Any area with a fast growing population faces rising pressure on property prices, and the reverse is just as true. The difference is that the world has limited experience with entire countries facing falling population. Japan is at the leading edge of that curve and has been experiencing declining real (net of inflation) property prices every year for the past 20 years. Likewise, Spain and Italy's’ prices have declined for 10 years straight, while Germany and The Netherlands have had no growth in home prices despite stronger economic growth.

In fact, looking back over the past 40 years, Australia is the only country not to have experienced a significant decline over any given ten year stretch. The US and UK have had 15% and 11% falls in real terms respectively, while European countries have ranged from a 5% fall (France) to a 64% fall (Spain).  Japan has fallen 30% in real terms and South Korea, thanks to the Asian financial crisis, once fell by 55% in 10 years. Even New Zealand has had a 22% decline, back in the late 1970s to early 1980s when its population declined.

Property is by far the most sensitive asset class to population growth – and it’s not just residential property.  The impact on rents and capital values for retail and commercial property can be just as severe. Think also about the impact on social infrastructure and the potential for there to be empty public buildings in neighbourhoods with declining populations. 

Figure 1 gives an idea of the potential for empty schools potentially being replaced by hospitals and aged care.  Europe will need a lot less schools with 9% less people of school age – that’s around 12,000 less schools required.  But they will need to accommodate 24 million more people of aged care age (85+), or around 140,000 more aged care homes.  Australia, on the other hand, will need 27% more schools and 227% more aged care facilities – over three times as many as exist today. 

Lower inflation and interest rates

Inflation is linked to property and also to the simple supply and demand dynamics that drive commodity prices.  The cost of extracting or growing commodities falls with technological improvements over time so when this combines with declining population growth, will likely result in falling commodity prices.  If food, energy and base metal prices show less inflation as these population changes take effect, this will have a major impact on inflation over the next 20 years. 

For other asset classes, the implications are more mixed. Equities tend to be more global – you can export goods and services, but not property.  However equities need economic growth to maintain rising fortunes, so the lower population growth rate is globally, the more equity prices face downward pressure.  More likely is that as growth rates slow, companies will return more profits to shareholders – increasing dividend yields and appealing to the retired investor population. This will reduce the upside potential of equities, but likely maintain overall return rates at around 4-5%pa over CPI. 

For bonds, the implications of a higher retired population means more demand for yield. As a result, bond prices are pushed up while yields decline, compounding the impact of lower inflation.  We have already seen the trend start as baby boomers retired. The rapid rise in retired age populations in wealthy nations will continue until 2040, when numbers will double. 

When investing for your family, 2050 is not that far away

Many clients say, half jokingly, that 2050 is too long term for them to worry about.  On average this actually isn’t true, especially for those wanting to leave a legacy inheritance to help their kids.  The average 65 year old today will live until around 2039, meaning 50% will live beyond that.  For today’s retired investors, 2050 is a very relevant timeframe.

Global demand for products and commodities required to build growing populations (property, infrastructure, equipment) should start to fall immediately and get rapidly worse over the next 20 years.