‘Three gears’ of demographic demand

It is widely understood that demand for urban housing is driven by demographic trends; the more people there are, the more housing they need. However, a deeper analysis reveals that this is not simply population growth, but rather three distinct and interlinked ‘gears of demand’: population growth, urbanisation, and household formation. Since 2010, the European population has grown by 3.1%, Europe’s hundred largest cities has grown by 7.4% and the number of households in these 100 cities has grown by 9.8% growth. 

These three ‘gears’ work together to drive demand for urban housing. First, an increase in the general population increases demand for housing at the country-level; second, urbanisation concentrates demand into urban areas; third, that demand is splintering into more (often single-person) urban households. The second trend leverages the first, and the third leverages the second, such that the urban household growth is 3.1 times the broader rate of population growth. 

Demographics in the time of COVID-19
Notwithstanding the pandemic, population growth forecasts remain largely unchanged. Moreover, household formation is largely driven by the rise of single-person households, itself driven by manifold other socio-economics trends such as rising GDP per capita and female participation in the labour market – neither of which are likely to unwind soon. 

However, post-pandemic, some have started to question the continuation of urbanisation, despite historical precedent; the Italian city states quite literally experienced a Renaissance following the bubonic plague of the 14th century and Manhattan’s skyline was defined by buildings that immediately followed the Spanish flu of 1918. The principal concern is that working from home will drive an exodus from major cities. In fact, we were seeing a shift in the European population towards the suburbs prior to the pandemic. 

Bringing forward settling down
The proportion of the global population living in suburbs increased from 30% in 2012 to 34% in 2019 . Clearly this was not in anticipation of a pandemic, nor was it driven by working from home trends, but rather inexorable demographic trends and geographic constraints. Data from the UK shows that while younger adults move to cities on a net basis during their 20s, people start to leave London for other parts of the country from around the age of 30 . Thus, short-run increases in the 20-24 and 30-34-year-old cohorts can explain short-term increases in the city and suburban populations respectively. It is quite likely that many of those around 30 years-old will have brought forward the decision to move to the suburbs because of the pandemic, but this cannot be sustained given the limits of this demographically driven demand.

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The limitations of urban planning
It is important to note that the growth of the suburban population is largely at the cost of the rural population, is still accretive to urbanisation overall (as defined by the vast majority of statistical agencies) and is increasingly concentrated around the major metropolitan areas of Europe such as London, Paris and Madrid. However, given historic city centres, urban planning has had to push new development to the suburbs. For example, in Paris, the city centre is constrained by the Hausmannian real estate stock pushing corporate occupiers to the outer districts, most notably La Défense in the West. The Grand Paris project will support this shift with over 200km of rail network to connect these outer districts. In London, Europe’s largest transport infrastructure project Crossrail will provide similar support to London’s suburbs.

The economic geography of jobs
It is estimated that between 74% and 82% of the European workforce cannot work from home for more than two days a week, if at all. Moreover, job creation is highly concentrated around these major metropolitan areas. In contrast to the United States, much of the economic geography of Europe is highly centralised. London and Paris account for more than one-in-five offices jobs in their respective countries and take an outsized share of growth . Across Europe, 48 cities account for more than half of its high-tech patents, three-quarters of its start-ups, and 83 percent of its STEM graduates . Younger generations looking for jobs in high value-added sectors have little choice but to flock to these major cities. Until now, affordability has been a significant barrier to entry to the younger cohort. But now that city centres rents have rolled back several years in key gateway markets, they have become accessible to a new generation.

The most reliable guide to the future
It is too early to say what the effects of the pandemic on the urban economy will be. In my lifetime I have heard market commentators predict the rise of business parks during the dot.com boom, the rise of Frankfurt as Europe’s financial capital following the introduction of the Euro, the death of the skyscraper following 9/11 and the death of the City of London following the Global Financial Crisis – all have been proven wrong as they underestimated the inertia of pre-existing structures. Despite demographics offering us the most reliable guide to the future, we often chose to ignore them. To quote Peter Drucker “What makes demographics such a rewarding opportunity for the entrepreneur is precisely its neglect by decision makers, whether businessmen, public-service staffs, or governmental policymakers.”

This article was written by Nigel Allsopp, Greystar, and Member of the INREV Research Committee.