When investing in property, there are several factors which can impact whether you will be successful, and to which degree. In this blog, I will cover 5 reasons why population growth, one of these factors, is critically important.
- Supply vs Demand
When considering what drives an increase in the price of an asset, it ultimately boils down to supply versus demand. As a result, whenever the population growth rate exceeds the rate of supply of new properties in a location, demand, and naturally property prices, increase (all other factors being controlled). Furthermore, a strong population growth can be paired with a limited capacity for supply to accelerate an already favourable rate of property price increase.
A good example of a location where demand is significantly greater than property supply, due to population growth, is Manchester. Although greater Manchester needs 11,254 houses per year, there are only 7,000 in pipeline for the next two years… That’s only 3,500 of the 11,254 required, or 31%, being provided per year!
- Places to Avoid
Population growth trends can make it easy to identify locations where investing in property may not be appropriate. For example, Japan is expected to experience a population shrinkage of 88.08 million by 2065, roughly a 30% fall from 2015. Due to factors like this, it is not surprising that Japanese homes devalue as much as 10% per annum, and are usually rebuilt after 30 years (granted, the reasons for this are multifactorial).
- Economic Performance
Population growth trends can be better indicators of investment viability than previous economic performance. This is the ideology taken by Klépierre, Europe’s second largest listed property firm, which focuses on the population growth of cities, more so than previous economic performance, when deciding where to expand or sell holdings.
In the words of Laurent Morel, chairman of Klépierre, “Demographic growth produces economic growth in a much shorter period of time — both from people moving to the place and people being born there”. Therefore, significant increases or decreases in population size can function as green lights or red flags, respectively, with regards to the future investment viability of a location.
Although there are several factors contributing to population growth, such as fertility rates, it is well known that desirability has a positive causational relationship with both population growth and property prices. Therefore, it is often the case that locations with strong population growth display strong demand, not only due to scarcity of properties, but also due to the available properties being more desirable than average. Essentially, you are killing multiples birds with one stone.
According to the United Nations, the global rural population is expected to peak and then decline from 2020 onwards. Furthermore, the world has experienced an explosive growth in its urban population, currently accounting for 54% of the world, and a projected 65% by 2050. Therefore, as the world become more urban, locations previously overlooked for investment purposes may begin to provide even greater opportunities than current BTL hot spots. Consequently, it is more important than ever to keep an eye on population growth trends, as they may provide an early insight into future BTL opportunities.