Sunday, 22 September 2013

Properties and the Population Picture

I've written a couple of times about the potential impact of demographics changes to the property market in future. However, I'm not sure how many people actually noticed and think of it in the current rage over properties. Since words did not effectively convey the message but a picture can say a thousand words, let's try showing pictures instead.

Below is a picture taken from the Opening Address at the “Our Population, Our Future” Townhall Dialogue in Oct 2012. It shows that with a Total Fertility Rate (TFR) of 1.2, the size of every subsequent generation will be reduced by 40%.

Do take note that the picture below does not reflect the current demographics figures. It is reflective only if the TFR persists at 1.2 for at least 2 generations. So, the discussion in this blog post on the potential impact on the property market applies in the future when we are about to retire and not currently.

Figure 1: Impact of TFR of 1.2 on Generation Size

How will the above picture impact the property market in the future? Each generation does not operate independently in the property market. When Our Generation retires, we will need to find alternative sources of income to support our retirement. Since quite many people are asset-rich but cash-poor (and assuming this trend continues), one possible option is to sell our properties to those who are buying, i.e. the Grandchildren Generation who are setting up their families. Even if some of Our Generation do not need to sell or downgrade their homes, eventually their properties will be passed down to the subsequent generations as inheritance.

Hence, based on the above picture, we are looking at 36 nos. of the Grandchildren Generation buying/ taking over the properties of 100 nos. of Our Generation. I cannot see how 36 persons can absorb the properties of 100 persons. We can only hope that our grandchildren will be 3 times as rich as us.

To be fair, the demographics picture above cannot be directly applied to the inter-generational transfer of assets. People are marrying later nowadays, at a median age of 29. So the inter-generational age gap is about 30 years, i.e. when Our Generation reaches the retirement age of 65, the Grandchildren Generation is only about 5 years old, hardly able to support themselves, much less to take over the assets from us. Readjusting the demographics picture to an inter-generational age gap of 20 years, the relative size of each generation would be as follows:

Generation Age Size
Our 65 100
"Children" 45 71
"Grandchildren" 25 51

The age of each generation in the above table looks more reflective of the actual age of the net buyers and sellers in the property market, with Our Generation planning to sell at the retirement age of 65 and the "Grandchildren" Generation (in "quotes" to differentiate it from the actual Grandchildren Generation) planning to buy around the marriage age of 29.

Based on the above table, there will 51 nos. of the "Grandchildren" Generation buying/ taking over the properties of 100 nos. of Our Generation. While the figures are better, it still does not change the overall picture that there will be more net sellers than buyers in the property market when we are ready to retire.

Having said that, there are many other factors affecting the property market besides demographics, such as migration, new housing supply and property regulations. A lot of these factors are unpredictable, especially in the long term. But the one fairly predictable factor that is demographics shows that the property market when we retire will be quite challenging. For a more complete discussion of the impact of migration and new housing supply, you can refer to the post on Properties, the Population White Paper and the Land Use Plan.

Interestingly, how did Our Generation end up in such a situation? The figure below shows the relative size of each generation based on an inter-generational age gap of 20 years:

Figure 2: Relative Size of Each Generation
The relative size of the "Grandparent", "Parent" and Our Generations are based on the actual population statistics in Jun 2011 for the age groups 75 - 79, 55 - 59 and 35 - 39 respectively (Note: I am in the 35 - 39 age group, but you can recalculate the relative generational size for your own age group using data shown in the post on Properties, the Population White Paper and the Land Use Plan). However, do note that there is higher mortality among the "Grandparent" and "Parent" Generations, so their sizes are smaller than they should be. The relative size of Our, "Children" and "Grandchildren" Generations are based on the TFR projection mentioned above.

As can be seen in Figure 2 above, when Our Generation is buying properties to set up families, the "Grandparent" Generation is much smaller and buyers outnumber sellers. But when Our Generation is going to sell properties when we retire, the "Grandchildren" Generation is also smaller and sellers outnumber buyers. In short, Our Generation is at the short ends of both sides of the transactions.

Nevertheless, there are actions that Our Generation can take to avoid such a situation. We could either have more babies, or avoid being asset-rich and cash-poor when we are about to retire.

See related blog posts:

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