Housing demand and demographics

Housing demand and demographics

5 Nov 2015

If you arrived today from Mars and the first human you met tried to explain the housing market, you might hear that average prices are >10x average earnings for the first time and that interest rates are at a 3000 year low. If he then told you to invest all your savings in a property you would probably zap him into a little pile of ashes. Because Martians can do that.

Yet you would soon find that this apparent rogue adviser would have felt (were he still capable of it) unlucky to have been zapped because he was part of a crowd and people in crowds typically feel (unjustifiably) secure. He could have pointed you at newspaper stories following the latest population estimates from the Office of National Statistics (ONS).   

Britain’s population set to rocket by 10 million over next 25 years


Migration will cause UK population to explode by almost 10 MILLION over the next 25 years

I suppose that headlines of “UK population to grow by compound rate of 0.54% per annum” would have seemed less exciting though that is exactly what the estimates amount to.

While I think that 25 year projections are so likely to be wrong as to be next to useless it is worth remembering that average GDP growth in the last 60 years has been 2.5%. It is also worth mentioning that population growth from 1981 to 2015 was compound 0.44% per annum. On a per head basis we have all become much better off. This may be why old people of today have trouble reconciling what counts as poverty today with what they remember from their childhoods.

But an increase in the annual rate of population growth from 0.44% to 0.54% is an increase and is clearly a very important matter to some people. What particularly seems to strike fear and loathing into the population is that the ONS estimates that half of the extra 10 million will be from net migration. (The government’s annual net migration target of c.100,000 is ignored by the ONS which assumes a persistent long term rate of 185,000).     

But 10 million extra people will need somewhere to call home. At the very least they will need a bed. At present, each UK dwelling provides beds for around two and a third people on average. That implies 4.3 million new dwellings. Over 25 years that’s 170,000 a year. This is obviously nowhere near the 240,000 a year that every politician and journalist in the land seems to feel is essential.

The ONS estimates for population growth in the next 15 years, up to 2030, are worth looking at in some detail because they are at least plausible extensions of the demographic trends of today. 


The first thing that jumps out of that table is that more than 5 million of the extra 6.25 million new citizens will be over 60 years old and that 2.7 million will be over 75.  

How many of 2015’s 160,000 new homes are being built for the retired and elderly? All the political guff that one hears is about “hard working families” and their “right” to own a home. I would suggest that they examine very closely their right to decline to buy into the property market at today’s prices.

Around one third of new homes in the UK are flats. In London, the proportion must be far higher. In London, 75% of new homes have two bedrooms or fewer.(Source: GLA: Housing in London 2014).That implies around 15,000 new flats in London and 45,000 in the rest of the country. That’s a total of 60,000 a year.

Who lives in a new flat? The answer used to be that new flats were for first-time property owners. A flat was the first rung on the famous property ladder. Once upon a time these people were in their twenties. Now they are just as likely to be in their thirties, I suppose.

Let us assume that the new demand for new flats is likely to come from the 972,000 (106k + 866k) additions to the 15-44 age range in the next 15 years, as indicated in the table. That’s an average of 65,000 new flat-seekers each year. Happy days! We’re already building 60,000 new flats each year! Or should that be unhappy days? How many individuals buy a flat and live alone? Not all that many surely?

Today, 16% of adults live alone. Applying this ratio would be 10,400 out of 65,000 meaning that the remaining 54,600 would be sharing a maximum of 27,300 flats. That takes the average demand for new flats down to 10,400 + 27,300 = 37,300. That would appear to leave us with a theoretical surplus of 27,700 every year. We might be building nearly twice as many flats as we need.

It may be that I feel this acutely because there are currently plans to build c.20,000 new homes (mostly flats, mostly on what is known as the “Greenwich peninsular”) within five miles of my house. I have no objection to living next to half of the UK’s new flat buyers but I do wonder seriously if the developers have done their sums properly. I have imagined the future and it consists of a Siberian wind sweeping down the Thames estuary and swaying a small forest of empty tower blocks (30 floors high).  

And what of the oldies? The 181,000 thousand a year who will be joining the ranks of the over 75s? Many of them, whether through bereavement or fragility, will be selling the family home. I doubt if they will be moving into the 23rd floor of a tower block, however ”luxury” its flats may be. I expect that there will be plenty of demand for well managed retirement homes, though you will struggle to find much public discussion of this rather imminent and surely urgent need.

Here is some good news. McCarthy & Stone, which claims to account for 70% of the nation’s owner occupied retirement home market, is listing on the London stock market (supposedly this month). So, if the price is reasonable, we may be able to invest. Here is some less good news. In the year to 31 August 2015, McCarthy & Stone completed 1923 units. If its claims of market share are correct, then the UK market added 2750 units in the last year.

I may be wrong, but I suspect that investment in public housing for retired people is not exactly taking off.

It seems to me that housing policy is looking backwards. Developers are investing in historic demand that is destined to go stale and ignoring the highly unglamorous market that demographics predict. It might be good news for those hoping for the deflation of the “property bubble”. A revision to mean, by which real long term house prices grow in line with real per capita GDP growth, would probably be beneficial from a utilitarian point of view. But don’t let your fortune be among those that get damaged in the process.   


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