Demographics for a new decade

Australia’s population will be one million less in 2022 than expected pre-pandemic. But hidden behind this statistic is a huge opportunity to create more vibrant CBDs and better quality buildings, says demographer Simon Kuestenmacher.

The phrase ‘demography is destiny’, attributed to French sociologist and philosopher Auguste Comte, is as relevant to real estate today as it was in the nineteenth century.

COVID-19 is changing the demographics of our nation. A clear consequence of closed international borders is one million fewer Australians by the end of 2022 than previously forecast. For the first time in more than a century, Australia’s population has declined.

“Every aspect of business in Australia rises and falls with the number of people,” Kuestenmacher says. A rising star in the field of data management and insight, Kuestenmacher is co-founder of Melbourne-based The Demographics Group. He is heading to Hobart in October to speak at The Property Congress.

Demography – the study of events that shape the structure of human populations, such as births, age, deaths, fertility rates and income – is something of a crystal ball that can help us predict the future.

“Prior to the COVID-19 pandemic, Australia was adding up to 400,000 extra people to our population every year. We needed housing and we needed it fast,” Kuestenmacher explains.

Melbourne added one million residents between 2007 and 2017, followed by Sydney (806,000), Brisbane (449,000) and Perth (415,000). When time is of the essence there are two “tried and tested” housing delivery methods: large residential towers near job centres in the inner city and large greenfield projects near the urban fringe.

“Then COVID hits and, all of a sudden, instead of plus 200,000 or 300,000 net new migrants we have minus 100,000 – that’s a big change.”


Millennials and the monumental opportunity

The implications start with demand for dwellings, but the impact is uneven. The “overwhelming” majority of our migrants are young – either international students or skilled migrants in their 20s and 30s – who make the move to Australia before they start a family.

“These migrants don’t need three- or four-bedroom houses. They are looking for apartments close to their work or study. Take away these migrants and demand for one- and two-bedroom apartments just evaporates.”

The consequences are playing out around the country but are stark in Melbourne where an estimated 4,000 apartments are for sale or vacant in the city centre. Median values of units in inner-Melbourne fell by an average of $33,313 between the onset of the coronavirus pandemic and January 2021. Rents have also fallen, with yields declining from 6.3 per cent pre-COVID-19 to four per cent in December 2020.

“The residential sector will have to reinvent itself – and one of the most obvious things to rethink is who lives in apartments,” Kuestenmacher says.

Enter a monumental opportunity in the shape of the Millennial generation. Millennials or Gen Ys, born from 1982 to 1999, are now “the biggest generation by a million people”. A generation of “procrastinators”, Millennials have started families later in life, but this cohort of inner-city denizens is now on the hunt for their first home. “They need more bedrooms. They want Zoom rooms. But after 15 years of living in the city, they aren’t prepared to move out to the suburbs.

“An easy way to re-enliven CBDs is to get more people to purchase a property there, and then they will stay for 20 years.”


Building a new business case

Kuestenmacher says the business case for larger apartments may not have stacked up previously, but the game has changed.

Larger apartments may be less lucrative, “but one-bedroom apartments won’t sell for at least the next couple of years, while there will be demand for three- and four-bedroom apartments”.

“In the past, developers have said they can’t sell three- and four-bedroom apartments in the centre of Sydney or Melbourne – and that may have been true. But that target market was Gen X – a rather small generation in size. With a small number of people looking and enough housing stock available, why bother moving into an experimental apartment?”

Millennials, on the other hand, have spent a far greater portion of their lives in the inner city than previous generations. “They might have been living in their community for 15 years and are reluctant to leave.

“If you look at housing preferences, everyone wants a big villa in the centre of the city with a swimming pool for $500,000. Of course, this is not available so there has to be compromises. One thing people won’t compromise on is the number of bedrooms.”

What about Baby Boomers? Can downsizers fill the gap? “Baby Boomers are still too young, too healthy and too agile to downsize at scale. That won’t happen until the 2030s. Then all those houses will be entering the market – but that is still a decade away,” Kuestenmacher says. “If I have to predict the next decade, I’d say the property industry has to innovate.” As the need for speed dissipates, a pivot towards larger apartments can deliver better quality buildings.

Kuestenmacher points to dense housing stock of medium height – up to four storeys – that has been delivered in Europe for centuries. “In Europe, the average life expectancy of a house is 120 years. In central Paris you’ll struggle to find anything newer than 150 years old. How many Australian houses built in the last decade will be around for a century?”

Don’t be afraid of the shift ahead, Kuestenmacher adds. “We will create more vital inner cities and better quality buildings.”