How Will Lower Population Growth Impact Property Markets? - CBRE RESEARCH MARKET SNAPSHOT
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CBRE RESEARCH MARKET SNAPSHOT How Will Lower Population Growth Impact Property Markets? MAY 2020
COVID-19 WILL LIKELY CAUSE AUSTRALIA’S POPULATION GROWTH RATE TO FALL TO ITS LOWEST LEVEL IN OVER A CENTURY A lingering impact of the COVID-19 pandemic for Australia will be two to three years of significantly lower population growth. Australia’s borders will be partly closed until the risk of importing the virus is virtually quashed, whether through its containment globally or a vaccine being widely available. Unfortunately, to close off migration of the virus, Australia will need to do likewise to its carriers – people. CBRE RESEARCH | © 2020 CBRE, INC.
ANNUALISED POPULATION GROWTH 2008 TO 2018,
That move will significantly
SELECTED OECD COUNTRIES (Figure 1)
impact the Australian economy.
Net overseas migration has 1.8%
1.6%
accounted for almost 60% of
1.4%
the 1.6% average annual 1.2%
population growth over the past 1.0%
0.8%
decade. The Australian
0.6%
economy has become highly 0.4%
dependent on a population 0.2%
0.0%
growth rate far higher than the -0.2%
OECD average and most -0.4%
y
nd
na
ia
n
a
D
28
US
UK
OECD countries (Figure 1).
an
ad
pa
EC
al
hi
a
EU
m
s tr
al
an
Ja
C
O
er
Ze
Au
C
G
ew
N
Source: OECD, CBRE Research
CBRE RESEARCH | © 2020 CBRE, INC.
With borders partly closed for an extended period, Deloitte Access
Economics (at Q1 2020) is forecasting just 0.8% population growth
in 2020 followed by 0.6% (the lowest rate since 1916) in 2021
before the recovery begins with 1.1% growth in 2022. Over these
three years, if this scenario eventuates the result will be
approximately 480,000 fewer people in Australia by end-2022 than
would have been expected had the pandemic not occurred.
This population ‘shortfall’ of almost half a million people – roughly
the population of Tasmania – will have adverse impacts for tenant
and investor demand within Australia’s property markets. This
report seeks to quantify the impact of lower population growth on
various property sectors in Australia.
CBRE RESEARCH | © 2020 CBRE, INC.
OFFICE
Office sector more resilient because not all migrants are white collar employees
The COVID-19 pandemic will weaken office tenant demand over the next couple of years due to softer business
conditions. Lower migration to Australia will also impact the office sector. Over the past five years, approximately 21%
of net overseas migration was from skilled labour, moving directly into the Australian workforce. Also, just over 40%
was from overseas students studying in Australia, with some of those graduates progressing into the Australian
workforce. This skilled migration contributes to office demand across the country; it’s no coincidence that Melbourne’s
recent excellent performance in terms of while collar employment growth has coincided with Victoria leading the
nation in terms of population growth.
CBRE RESEARCH | © 2020 CBRE, INC.
471,000 fewer permanent migrants
To calculate the impact of lower population growth on office demand, we’ve focussed on reduced levels of migration.
Natural population growth (i.e. births) accounted for 60bps of population growth over the past five years. We’ve assumed
that number holds going forward and have deducted it from the aforementioned annual population growth forecast
numbers (0.8% in 2020, 0.6% in 2021 and 1.1% in 2022). This results in 471,000 fewer permanent migrants over 2020-
22, accounting for almost all of the 480,000 lower population growth forecasted.
Two additional assumptions help shape our outlook for the migration impact on office demand:
21% 73%
of migrants are skilled of skilled migrants are white collar employees
72,000 fewer white-collar migrants
Based on this, we estimate 72,000 fewer white-collar migrants to Australian over 2020-22 than could have been
expected pre-COVID. We’ve pro-rated the 72,000 across CBD office markets based on the number of white-collar
employees as a proportion of the national total, and then applied a floor space ratio of 12 square metres per employee.
Figure 2 shows our estimates for the reduction in net absorption for CBD office markets over the three years analysed.
CBRE RESEARCH | © 2020 CBRE, INC. Source: CBRE Research 2020
Office sector better protected
The impact of lower migration (and population growth) appears as though it won’t have much of an impact on office
demand. However, given the Australian economy’s dependence on migration as a source of growth, there will be
downstream impacts to demand as a result of lower population growth. Additionally, the global economic climate will
remain challenging over the next 12 to 18 months. We expect the office sector will be better protected than most other
property sectors through the period of lower population growth, but it won’t come off unscathed.
ESTIMATED DECREASE IN NET ABSORPTION DUE TO LOWER POPULATION GROWTH
- 2020 TO 2022 (Figure 2)
Perth CBD & West
Sydney CBD Melbourne CBD Brisbane CBD Adelaide CBD Canberra
Perth
32,000sqm 31,000sqm 12,000sqm 8,000sqm 12,000sqm 5,000sqm
Source: CBRE Research 2020
CBRE RESEARCH | © 2020 CBRE, INC.
RETAIL Lower population growth will be a less obvious challenge to retailers Lower population growth over 2020-22 will be a further COVID-19-related challenge to Australia’s retail trade environment, coming on the back of the shutdown period over March to May where shopping centres experienced high levels of temporary vacancy. $11.3 billion in ‘lost’ retail spend Our estimates of 480,000 fewer people (compared to previous forecasts) by end-2022 equates to $11.3 billion in ‘lost’ retail spend (based on current retail spend per capita). Annualised over 2020-22 this represents 1.1% less retail spending per year than would have occurred. Whilst ostensibly not a massive reduction, it represents about one-third of the average annual growth rate of retail turnover in the past decade, 3.35%. It is a significant fall that will be exacerbated by the weaker economic climate and a large reduction in international tourists. CBRE RESEARCH | © 2020 CBRE, INC.
Discretionary retail categories likely to range from 7-10% between growth in a climate where retail
face greatest challenges
now and end-2021, household sales growth will struggle to keep
The weaker economy over the next propensity to spend will be lower. pace with inflation. Unfortunately
12-18 months presents a bigger due to the COVID-19 pandemic
headwind to retail than lower Neighbourhood shopping centres the challenges for retail will continue,
will show highest resilience
population growth. This is especially but it won’t be the only property
the case for discretionary retail We expect neighbourhood shopping sector to face challenges over the
categories – those other than Food centres will demonstrate more next 18 months. Moreover, it will
in Figure 3 – which make up around resilience in terms of capital value spur innovation and evolution from
59% of retail trade. These categories preservation over the next 18 months. retailers and landlords in the sector,
are more sensitive to economic Most larger shopping centres and bringing the future closer.
conditions, and with unemployment CBD retail won’t achieve rental
Food
PROPORTION OF 14.4%
Household goods
AUSTRALIA RETAIL 41.0%
14.1% Clothing & Footware
SPEND BY BROAD
Deparment stores
CATEGORY (Figure 3) 5.8%
7.7% Cafes, restaurants &
17.0% takeaway food
CBRE RESEARCH | © 2020 CBRE, INC. Other Source: CBRE Research 2020
RESIDENTIAL
Buyers’ market returns as undersupply is deferred due to lower population growth
Ahead of the onset of the COVID-19 pandemic, the level of new residential supply in Australia was declining.
Dwelling completions in Australia in 2019 tallied 203,500, a 7% decrease from the 2018 record high. Importantly,
commencements were also reducing significantly, particularly for apartments in the major capitals. Apartment
commencements in 2019 were ~35% below their 2018 level; house commencements were also down, by around 12%.
Due to lower levels of dwelling commencements, we had been estimating a decrease in total dwelling completions
(gross supply) to around 160,000 to 170,000 annually over the next three years (to end-2022), translating to net supply
of ~140,000 dwellings per year, levels last seen in 2013-14.
CBRE RESEARCH | © 2020 CBRE, INC.We were expecting the new supply market would tip back into undersupply for the first time since 2014,
with net undersupply of ~45,000 new dwellings over the three-year period, as illustrated in Figure 4.
AUSTRALIA RESIDENTIAL NET SUPPLY / DEMAND BALANCE (FORECASTS WERE PRE-COVID)
(Figure 4)
200,000
150,000
Number of dwellings
100,000
50,000
0
-50,000
-100,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: CBRE Research 2020 Annual oversupply/undersupply Dwelling demand Net dwelling supply (adjusted)
CBRE RESEARCH | © 2020 CBRE, INC.Lower population growth will outweigh supply deficit
We are now certain there will be downside to our previous forecasts of new supply, albeit the scale remains difficult to
forecast at this juncture given the uncertainty of the speed of economic recovery in Australia. The impacts of a much lower
rate of population growth from 2020-22 will, however, offset lower supply scenarios; thus we expect dwelling undersupply
in many markets will be pushed out to 2022 rather than occurring earlier.
To illustrate, we have modelled two COVID-19 impacted scenarios in new supply levels from 2020 to 2022, namely:
A ‘modest’ 10% A ‘severe’ 25% decline over the three years,
decline in previously with a 20% fall in 2020 followed by a 30% fall in 2021
forecast completion as commencements lag recovery before beginning to
levels, resulting in 50,000 increase again from 2022. This scenario results in 124,500
fewer new dwellings fewer dwellings over 2020-22, resulting in completion
supplied over 2020-22. levels falling to levels last seen in the mid-1980s.
CBRE RESEARCH | © 2020 CBRE, INC. Source: CBRE Research 2020Apartment markets most heavily impacted
Based on forecasts of 0.8% population growth in 2020, 0.6%
In both cases, apartment markets are likely to see the
in 2021 before starting to strengthen (to 1.1%) in 2022,
biggest drops, given the length of time necessary to complete
around 200,000 fewer dwellings will be demanded nationally
major projects, the lead time necessary to achieve project
over the three years than was expected prior to the onset of
presales and funding, rising vacancy rates and the fact that
COVID-19. This estimate is based on a ratio of 2.4 people
demand for this form of residential stock will be the most
per dwelling, a ratio derived from ABS data on population and
adversely impacted by partly closed borders limiting offshore
housing stock.
demand.
So rather than a state of undersupply, 2020 and 2021 look
These modest and severe scenarios playing out would result
set to produce an oversupply of new dwelling stock of around
in delivery of between 50,000 and 124,500 fewer new
63,000 dwellings, unless there us upside to population
dwellings by end-2022 than previously expected. In a normal
growth forecasts or the supply pipeline shrinks even further
demand environment, such a decline in supply would rapidly
than the 25% mark under the ‘severe’ scenario. Population
exacerbate undersupply pressures.
growth is expected to accelerate by 2022, and with the
However, lower population growth as a result of partly closed supply pipeline still likely to be constrained, this surplus will
borders will more than offset this lower supply. start to be absorbed.
CBRE RESEARCH | © 2020 CBRE, INC.Varied impacts on capital cities
Given the significance of net overseas migration
to population growth in the larger states, New
LOSS OF
South Wales (65,000 fewer dwellings demanded) LOSS OF FORECAST
STATE DWELLING
POPULATION ('000)
and Victoria (59,000 fewer) will feel the brunt of DEMAND ('000)
the lower demand, followed by Queensland New South Wales -157 -65
(42,000 fewer), as detailed in Figure 5. Victoria -141 -59
Queensland -100 -42
Western Australia -39 -16
South Australia -25 -10
ACT -8 -3
Tasmania -8 -3
Northern Territory -2 -1
Australia -480 -200
CBRE RESEARCH | © 2020 CBRE, INC. Source: CBRE Research 2020Markets were at different stages of their completions in 2019, and although was still in its earlier stages (and has
supply cycles at the beginning of 2020 stock under construction was falling, it a greater reliance on net overseas
and thus the supply/demand was still at a level which was likely to migration for population growth),
imbalances will not be spread evenly see its supply cycle push well into 2021 will likely take longer to adjust.
around the country. before easing noticeably.
In residential markets across
New South Wales was entering its Queensland first to emerge Australia, the next 12-18 months will
second year of declining supply from its be a buyers' market due to a smaller
market peak while Queensland was This suggests that when higher demand pool. Price discounting will
entering its third year. Queensland was population growth and subsequent be widespread, with the level of
likely to be approaching the bottom of demand does return, markets further discounting dependent upon
the supply cycle in 2020, while New past their supply cycle peaks, such as product type, location and quality.
South Wales was expected to see its Queensland, will be able to emerge In apartment markets, especially,
trough in 2021. Victoria, by contrast, from oversupply more readily. quality stock will be best placed to
was still near record levels of new Victoria, where the supply decline absorb the demand shock.
CBRE RESEARCH | © 2020 CBRE, INC. Source: CBRE Research 2020How Will Lower Population Growth
Impact Property Markets?
CONTACT US
Bradley Speers Ally McDade Tom Broderick Craig Godber
Head of Research, Australia Associate Director, Research Associate Director, Research Associate Director,
E bradley.speers@cbre.com.au E ally.mcdade@cbre.com.au E tom.broderick1@cbre.com Head of Residential Research
E craig.godber@cbre.com.au
CBRE RESEARCH
This report was prepared by the CBRE Australia Research Team, which forms part of CBRE Research – a network of preeminent researchers who collaborate to provide real estate market research and
econometric forecasting to real estate investors and occupiers around the globe.
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