Demography is a critical driver of real estate demand. Population growth in the world rapidly accelerated in the 20th century and is still increasing. While the growth may be leveling off in some industrialized countries, it is still robust in most countries.
Increased population requires more housing, shopping, places to work (which includes both factories and office buildings) and more hotels for travel and recreation. But sheer numbers are only one facet of the growing global population. As people become wealthier, per capita consumption in all goods and services rises, which includes, and sometimes is especially reflected in, real estate.
As shown in the table, the world’s population stood at 6 billion in 2000. By 2050, the world’s population, per the mid-range forecast, is estimated to reach almost 9 billion—nearly a 50 percent increase. It is not just the sheer numerical increase, but the distribution of the population—most will occur in emerging markets. In 2050, of the nearly 9 billion people living on the globe, 7.75 billion (85 percent) will be living in emerging markets while only 1.15 billion (15 percent) will be living in developed countries. Populations in Europe and Japan will actually decline, while the population in Asia as a whole will register an increase of nearly 70 percent.
The U.S. is expected to add 50 million people to its population over the next 20 years.
Not only is the world’s population growing, it is also aging in more developed countries. These shifts are changing the nature of demand for all types of real estate.
Throughout the world, populations are aging because people are adopting healthier lifestyles and healthcare systems are rapidly improving. In Western countries and in Japan in particular, death rates are declining. These regions are producing fewer children and their populations are living longer.
The histogram below shows European demographics in 1950. It depicts a broad base of young people (baby boomers) aged up to 19 years and a substantial working population aged 20 to 64 years, which supports the top layer of retirement-aged population at 65+.
In 2005, the demographic structure was strikingly different. The younger population of 1950 now constitutes the bulk of the population at working age and the young base is considerably narrower than the working-age base. With healthcare and increased life expectancy resulting in a broader retirement band, there will be fewer workers to support an increasingly larger retirement population. Looking at estimates for 2050, the retirement aged population will grow further to result in an almost inverted pyramid. Pensions and retirement investment become more critical in this scenario.
Is part of the rising appeal in real estate attributable to the fact that an aging population, generally speaking, seeks less risky investments? An investor is said to be risk-averse if, when given the choice between a riskless investment with a given return and a risky investment with the same given return, prefers the riskless investment. Because of the current income produced by stabilized, institutional real estate, it is generally considered stable compared to stocks.
The “lifecycle risk aversion hypothesis” predicts that risk aversion will increase over the lifecycle—which means, the older a person is, the more risk averse they become. The underlying explanation for this lies in the relative importance of labor income and asset income over the lifecycle. It is believed that the further a person is from retirement, the more risk they are willing to accept in their investments since the number of paychecks they expect to get is large and labor income can offset any adverse investment outcomes.
Risky portfolio allocation is significantly lower for older households. The closer to retirement a person gets, the fewer paychecks they have to cover any such adverse investment outcomes. Empirical evidence supports the lifecycle risk aversion hypothesis. Focusing on the effects of demographic changes on capital markets, they find an increase in the risk premium associated with an increase in the average age of investors.
In the United States, the leading edge of the baby boomers just began to turn sixty two years ago. Baby boomers are the wealthiest demographic segment in human history and there are about 75 million in the U.S. —currently representing about 27 percent of the U.S. population. If we accept that baby boomers will increasingly shift to less risky investments and that real estate is a low-risk, high-performing asset class, then the level of real estate investment will most likely continue to increase for the next two decades.