Falling birth rates threaten to upend living standards
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
UK inflation climbed 2.5% in the year to December, down from 2.6% the previous month. Economists had expected a rise of 2.6%, so this will help steady markets after a volatile fortnight. Core CPI, which strips out some of the more volatile elements of the index, eased to 3.2%, down from 3.5%.
Still, this will get worse before it gets better. Previous falls in energy bills will begin to drop out of annual comparisons and the price cap will rise again in April. Oxford Economics expects a quarterly inflation peak of 3.3% in the third quarter, leaving Bank of England policymakers the likely choice of cutting rates to offset rising unemployment, or holding rates steady to bring inflation back to target.
Birth rates
Our economy is supported by a pyramid-shaped population structure: a small cohort of retirees at the top, supported by a much larger working age population below.
This structure is being reshaped into something more akin to an obelisk as birth rates fall around the world. Across western economies and China, birth rates are now well below the rate of 2.1 required to maintain steady populations (see map). At this rate, falls in populations will be dramatic - in China, the share of people of working age will fall to 59% in 2050, from 67% today, according to a new McKinsey report.
The effects will be dramatic. In first wave countries across advanced economies and China, GDP per capita growth could slow by 0.4% annually on average from 2023 to 2050, and up to 0.8% in some countries. That's unless productivity growth increases by two to four times or people work one to five hours more per week. The UK, Germany, Japan and the US will all have to see productivity rise at double the pace seen over the past decade to maintain the growth in living standards witnessed since the 1990s.
Stocks with some connection to AI and automation helped power the US S&P 500 to its second year of 20%+ growth in 2024. Commentators have suggested the hype can't last - that the potential of AI has been overstated, but more supportive policies will likely arrive eventually, given that the sector currently offers the only feasible way to maintain the living standards we all expect.
Consumption
The housing crisis adds another layer of complexity to the problem. The economic contribution of older cohorts is currently propped up by the housing wealth they've accrued in recent decades.
Almost 80% of Americans 65 years and older are homeowners, and 60% of them are mortgage-free, which frees up resources to consume other goods and services. This almost certainly won't last; the average US single-family home was 6.6 times more expensive in 2023 than in 1980. Back then, the median home price was 4.4 times the median annual household income. In 2023, that ratio was 7.1 times and as high as 12.5 times in Los Angeles.
As the report notes, younger families buying homes may be left with a double burden of a higher mortgage and higher taxes to fund retirees. Younger people who eventually inherit homes may do so at older ages as their parents live longer. And there is no guarantee that home prices will keep rising in the face of declining populations.
Alongside spectacular growth in productivity, migration will have to be part of the solution. Sub-Saharan Africa, the only region in which birth rates aren't falling, currently accounts for 16% of the world's population. By the end of this century, it will have risen to more than a third. As Bloomberg's John Authers notes - these workers can fill the gaps emerging in the labor forces everywhere else, raising living standards globally. Of course, this would require a pivotal shift in attitudes to immigration among voters.
Absorbing volatility
Persimmon had a strong 2024, according to a trading update out this week. It built 10,664 homes, up by 7% on the previous year. The average selling price of its properties increased from about £255,752 in 2023 to £268,500. Sales rates per outlet per week climbed by 20%.
The company noted "evolving macroeconomic and geopolitical uncertainties, including the timing of future interest rate changes and the effect that they may have on our market and consumer confidence in the short term.”
Indeed, the housebuilders will welcome this morning's inflation print, which could give the mortgage lenders some breathing space. We're still yet to see any of the very large mortgage lenders raise rates in the wake of the bond market volatility and subsequent rise in swap rates, though barring any improvements some repricing will arrive eventually.
Vistry also has a trading update out this morning and Green Street News reports that Berkeley is back in the market for land.
In other news...
What's in store for housing markets in 2025? For a new edition of Intelligence Talks, Anna Ward is joined by head of UK residential research Tom Bill, head of European residential research, Kate Everett Allen and head of ESG research, Flora Harley. Tom Bill also gives his view to the Times on why UK house prices keep rising when the economy is stagnant.
Plus, Will Matthews shares the key trends shaping commercial real estate in 2025.
Elsewhere - Spain plans 100% tax for homes bought by non-EU residents (BBC), retailers to raise prices in response to budget tax hike (Reuters), business morale sank to 2-year low in late 2024 (Reuters), Rachel Reeves steps up pressure on UK regulators to scrap anti-growth rules (FT), Gilt investors warn Rachel Reeves she may need to raise taxes (FT), UK property insurance payouts hit highest level since 2007 (FT), and finally, maybe ESG is illegal now (Bloomberg).