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Demographics as Destiny

By Michael McKeown, CFA, CPA - Chief Investment Officer

What is the number one driver of long-term real estate prices?

It is not interest rates or public policy.

The areas in the U.S. with booming population inflows have a natural demand for more housing.  The west and southeast have home prices rising at the fastest rates in the country.  Supply can’t keep up with the demand from the influx of people moving into these areas, causing prices to stay high.  The trend applies across countries and time around the world.

Not only real estate prices, but also entire countries exhibit trends that follow demographics.  Greater population inflows contribute to higher growth over time.  In turn, this provides opportunities for innovation with the current generation, and more support for those in retirement.

Over the last several decades, the U.S. benefited from an increasing working population due to women entering the workforce and immigration.  As shown in blue, this added 1.1% to 2.2% to GDP growth from 1968 to 2007.  In the last decade, growth in workers fell dramatically, adding only 0.5% to GDP.  The grey bars show productivity growth, which also slowed in the past decade from 2008 to 2017.

Source: JPMorgan Asset Management

On a more global scale, when compared to the rest of the world, the U.S. is projected to have strong population growth the next decade.  Estimates show  China’s population growth will flatten out and Japan’s will decline.

A crossover point occurs in the year of 2030 for the U.S. versus China.  This is when the dependency ratio of working age people compared to retired age hits four for both countries.  After 2030, the ratio declines sharply for China as less working age people will be there to support the retired age population.

Over time, this will provide an advantage for growth against the rest of the world.  There will be many other factors that influence growth across the world.  This includes technology, productivity growth, rule of law, and trade policy.  Nonetheless, demographics remain a strong indicator of growth trends.

 

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