Last weekend, I was speaking with a couple of investors when the topic of declining population came up.
It immediately reminded me of a chart I saw on Twitter earlier this year:
I believe that a declining population is the highest-impact risk to investing in real estate over the next 30-50 years.
Why does it matter?
Without people, there’s no economy. And since it takes people to create economic outputs, economies will expand and contract along with the size of their population.
Pick up any guide on “how to select a market for real estate investing” and you can be it will start with population. It’ll tell you to go after markets with a growing population and to steer clear of markets with a stagnant or declining population.
This is because, in the words of Ken McElroy, “the supply of people drives housing demand.” Wherever people are, real estate generally tends to do well.
Here’s Ken making this exact point during the Investor Summit last month:
The inverse is true too – if there’s no people, there’s no demand for housing (and all other types of real estate too).
Lies, damned lies, and statistics
Say what you will about the quality of the government’s data and the accuracy of their forecasting.
But given recent headlines, there’s no doubt the chart above is at least directionally correct:
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The impact of immigration
As you can see on the chart (and the news headlines), a significant driver of the US’s continuing population growth has been immigration, of both the legal and illegal varieties.
While US citizens are having fewer babies, more foreign-born people are coming to the US.
Regardless of your views on immigration, more people in the country means more demand for housing, goods, and services, which is a tailwind for real estate (and businesses generally). Remember, “the supply of people drives housing demand.”
If current trends continue, it’s immigration that will keep the population growth from going negative in the future.
But assuming that the trend will continue is somewhat precarious – the immigration rate can be influenced much faster than the birth rate. And the politicians that can influence it are sure to care more about their self-serving interests than the impact to real estate investors.
What can we do about it?
Today? Realistically nothing.
Even if this chart ends up being spot-on, the really negative effects won’t start appearing for another 30+ years. So it’s fair to argue that it shouldn’t have a huge influence on current investing decisions.
I’m also mindful that extrapolating current trends into the future often completely misses innovations, political policies, and other changes that significantly alter the trends or render them obsolete. (Google “Great London Horse Manure Crisis of 1894” for an apocryphal example.)
I said earlier that I believe that a declining population is the highest-impact risk to investing in real estate over the next 3-5 decades. Not necessarily the most likely, but the highest impact.
So while there might be little impact to today’s investing decisions, I think it’s prudent to keep watching the trends closely and have a high-level gameplan in case the “what-ifs” come true.
Here’s how I’m thinking about it
If we were to have a declining population in the US, I see two possible paths for real estate investors:
Shift investment locations and continue to go where the people are. A declining overall population could mean that the population becomes more concentrated in fewer cities. These cities will see growth, making them target locations for investment.
Shift investment strategies completely. Maybe real estate doesn’t make sense as an investment in 50 years? I doubt that will be the case broadly. But regardless, technological innovations will bring us investment opportunities we can’t even fathom right now.
What do you think? Has population collapse been on your radar? When you hear about taking a long-term view with your investments, are you thinking not just in decades, but in generations?