What drives real estate prices – sheer numbers or economic weight? Intuitively, all other things being equal, consistently higher rates of growth of resident population in a region or country will drive up real estate prices by comparison to its neighbours and competitors.
The IMF once even advanced a rule that a 0.25% rise in the growth rate of population would lead to a 1% house price appreciation. But in Lithuania, real housing prices escalated by 375% between 2001 and 2007, despite negative population growth since independence in 1990.
Evidently, it is necessary to delve deeper. Do so, and it becomes visible that the actual demographic determinants of real estate prices are multi-dimensional: absolute levels themselves and rates of growth, but also life expectancy, and the crucial link between working populations, average incomes, and mortgage availability.
This has led to the ‘unaffordability bubble’ for median-income residents, estimated to be more than 50 million households globally by 2020 who could potentially be left out of affordable options within some of the biggest cities in the world.
The role of the ratio of working population to retirees has, over recent years, also surfaced as a key driver of real estate markets. In a country like Poland, for example, recent academic analysis has strongly suggested that an ageing population will reduce the demand for commercial property but bring an increasing demand for flats and houses adjusted to the needs of the elderly. This has already been observed in Japan, where both housing starts and property prices have had a strong correlation with core working age populations, and an inverse correlation with the old age dependency ratio.
The demography of the UAE
The government of the United Arab Emirates has conducted four censuses since the very first in Abu Dhabi in 1968.The Federal Competitiveness and Statistical Office and Government of Dubai have both updated the results of the latest 2005 Census to reflect immigration and expected birth and death rates. However, for the purpose of international comparison, many choose to rely on World Bank data, the latest of which, for 2017, puts the population of the UAE at 9.4 million.
The independent research group Global Media Insight (GMI) suggests a slightly higher and more conservative total at 9 million, rising to 9.6 million in 2018. A 7% growth rate following 7.5% in the previous year is highly noteworthy, and commentators will be keen to see what the World Bank itself says about the UAE population in 2018 and going forward. At anything like these rates of growth, however, it is clear that there has been a disparity between raw population growth and cyclical real estate prices. Even population growth at half the rate of recent years will see the UAE with 13 million people a decade from now. If the IMF’s rule of thumb were to hold, real estate prices will rise by 120% in a decade. Perhaps that is too optimistic, but investors would be encouraged by these population projections if they hold for a decade.
However, data by each emirate tells a different story. If the GMI data is correct, the UAE authorities will, at some point, want to take policy steps to adjust the disparity in population growth between Dubai, in particular, and the rest of the UAE. Currently, Dubai makes up just over one-third of the total population of the UAE. If its population continues to grow at twice the rate of its neighbours, in a decade’s time it will be home to almost 6 million people, which will start to raise a host of entirely different policy questions, including the availability of land.
Whichever way the composition of the UAE population by emirate proceeds, conventional wisdom suggests a broadly positive impact on real estate markets. Does the underlying composition of the population tell us anything more?
The predominance of males in the UAE population certainly does not explain it, even if there is now very limited recent evidence from Australia that women are more likely to buy property than men, at the same level of income. Males might well be more likely to support the real estate market than females overall in the UAE, because of workforce participation, except at the lower end of the income scale.
The evidence from the UAE certainly does not suggest that more families lead to more market stability, or even higher prices. The UAE’s population distribution has been this way for a long time, except in Umm al-Quwain, which has shown no noticeable difference in real estate price trends, as a result.
Nor necessarily does the predominance of South Asians in the population mix, as brokers from both commercial and residential property markets have always been clear that expatriates have always driven the UAE market. Academics researching the Saudi Arabian market of Jeddah have similarly concluded that citizenship of itself is not a dominant driver of real estate decision-making. All that might give pause for thought here is the performance of South Asian markets themselves, which might be diverting investment that has in recent years migrated to the UAE.
Trends in household size are clearly favourable, but only slightly so. Oxford Economics has forecast a reduction in average households in Dubai from 3.9 persons in 2000 to 3.6 persons by 2035, but this, even if correct, is likely only to have a negligible impact on the market in the short-to-medium term.
But finally – and in light of the OECD and other research, probably most importantly – the age composition of the UAE population is entirely favourable to the real estate market by comparison to developed countries.
According to GMI, only 1.5% of the entire UAE population is aged over 65, compared to 17% in Poland and a deeply concerning 27% in Japan. Even Saudi Arabia has 3%. None of this is meant to suggest that the silver dollar is not worth chasing, but the concern in developed countries is about retirees unable to fund their own retirement, and responding through downsizing, not attracting upmarket retirees.
An inquiring mind might then move to the economic demand generated by a rising population, and that is well worth a separate look. Although World Bank data only runs to 2017, GDP per capita for the UAE is undoubtedly more volatile than the population as a whole, and is positively correlated with real estate prices. But so far, as pure demographics are concerned, the evidence is quite conclusive: the UAE has enjoyed rapid population growth for decades, along with cyclical but largely favourable real estate market conditions.
There is also the question of the relative impact across different real estate market sectors. Existing research has concentrated on residential property, and with good reason, as the ratio of required retail space to population – and possibly even office space – is certainly fluid and might well decline in years to come, so may not be statistically reliable.
The question is, however, which is the real driver? While conventional wisdom has always suggested that demographics drive the market, the relationship between demographics and real estate markets in the UAE might be the inverse of an established market like Poland or Japan.
Real estate might be a leading indicator of demographic change rather than the traditionally modelled opposite direction of causality. Anecdotal evidence from 2019 already supports this argument, especially in the case of Dubai. The emirate might exhibit a different pattern of causality to the rest of the UAE, given the predominance of real estate in its GDP composition, setting it apart not only from the other emirates but also from most developed markets, although London and New York might run it close.
The consequence of this reversed causality could also be an increased level of real estate market volatility by comparison to developed markets being slowed by gradually rising levels of relatively lower income retirees.
Potential investors into the UAE market would benefit from their advisers modelling the causality in detail to assist their decision-making.
This article, and its accompanying footnotes, first appeared as a blog posted on Cavendish Maxwell's website.
Any opinions expressed here are the author’s own.
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© Opinion 2019
