13 December 2017
Post-Brexit London demographics and population growth
Major shifts in demographics such as a reduction in population growth or ageing can have a large impact on economic growth and real estate trends for decades
Demographics are a key determinant of an economy's growth potential. Indeed, economic growth can only be sustained by an increase in the number of workers, an increase in the capital stock through new investment, and/or an increase in productivity. Major shifts in demographics such as a reduction in population growth or ageing can therefore have a large impact on economic growth and real estate trends for decades.
The latest population projections for the UK suggest its demographic outlook has worsened. Overall, the 2016 projections show UK population 2.6% lower than previously anticipated by 2041. What is noteworthy in the current Brexit context is that the Office for National Statistics (ONS) has published variants to its projections based on different EU migration scenarios: under the 0% EU migration scenario (EU net migration falls by 70% in 2016-2023 then remains stable), UK population would be 3.8% lower; and under the 50% EU migration scenario (50% less EU net migration), UK population would be 1.9% lower. Interestingly the ONS has also released a zero net migration scenario in which the UK's population starts to decline in 2035.
London's demographic outlook has also been downgraded by the Greater London Authority (GLA), with population growth forecast to slow as a result of a slower rate of natural change (i.e. births less deaths) and lower levels of international and domestic net migration. In fact, 80% of the decline in the rate of population growth forecast to 2050 can be attributed to lower net migration, made up of 56% domestic and 24% international. Under the GLA's two alternative growth scenarios net migration accounts for 73% and 83% respectively of the forecast reduction of population growth.
London's population growth has been driven by migration and will continue to hinge on net migration
London's historic population growth and the outlook for it hinges on immigration. We focus in this article on what a post-Brexit immigration policy context might mean for net migration and population growth, with some thoughts about prospects for London's property market.
Migration to the UK has been a cornerstone of population growth: 81% of London's population growth between 1991 and 2014 was directly due to positive net migration, with most of the growth driven by European net migration. Indeed, London's UK-born population has grown by 0.4% pa over the last 10 years, whereas its EU-born population has grown by 7.7% pa and non-EU born population by 2.4% pa. Similarly, London's UK-born working-age population has grown by 0.9% pa, whereas its EU-born working-age population has grown by 11.4% pa and non-EU born population by 3.4% pa (Chart 1). Over the last 10 years the EU component of the total workforce in London has more than doubled.
Chart 1: London's population growth (2005-2015)
Note: Summary data of London's population - Calculated from the ONS Labour Force Survey which shows minor differences in estimated values from the mid-year estimates figures due to different statistical estimation techniques
Despite the importance of foreign migrants to population and economic growth in London, the government has made a clear commitment to reduce international net migration. We think this presents a big challenge to London because of its reliance on European workers at all skills levels and across all sectors. The proportion of EU-born workers in London's workforce is twice as large as that of the rest of the UK, and the proportion of EU students is similar.
There are three main channels through which this policy shift could impact London's migrant population: stricter immigration rules; a reduction of London's economic attractiveness; and a perceived erosion of its openness and reputation for diversity (Table 1).
Table 1: Drivers of EU net migration post-Brexit - risk by migrant groups
Source: Grosvenor Britain and Ireland research
A number of factors could mitigate the potentially negative impact on London's population growth rate:
- Firstly, a number of influential groups, alongside the Mayor of London, have called for an EU-specific immigration policy. Under this type of arrangement the UK government would implement a two-tier system for EU and non-EU workers that might benefit London in particular.
- Secondly, a rebalancing of the sources of migration between European versus non-EU migration as a result of ending EU freedom of movement is very likely. The two first countries the UK has approached to discuss new trade agreements, Australia and India, have both indicated that they would like preferential access for their citizens to the UK labour market as a trade-off for any future trade deal.
- Thirdly, any reduction in supply of international labour to London could be partially compensated by population movements within the UK. However, this only seems likely for higher skilled jobs given the high cost of living in London.
No ‘Brexodus’ but the UK is becoming less popular
Recent data suggests the UK is becoming less popular amongst EU migrant workers and students (equivalent data for London is not yet available). November 2017 migration data indicates that net migration to the UK slowed in the year to June to 230,000 due to lower immigration (-12%) and higher emigration (+8%). Over three-quarters of the reduction was accounted for by fewer EU citizens, notably those from ‘EU8’ countries including Poland, Czech Republic and Hungary (Chart 2). Long-term immigration for study purposes was also significantly lower in June 2017 (-14% compared to a year ago) (Chart 3).
Chart 2: Net migration to the UK by EU citizens
Note: Government migration figures from the EU are split into the following subgroups for EU countries:
- U15: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden
- EU8: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia
- EU2: Bulgaria, Romania
Chart 3: UK long-term international migration
Although data for London has not yet been made available, we think it is reasonable to assume that similar trends apply. However, it is important to note that net migration remains above its long-term average and well above the government's ‘tens of thousands’ goal. We don't therefore believe this represents the beginning of a ‘London Brexodus’.
Assuming the UK reaches a satisfactory agreement with the rest of Europe regarding EU citizen rights, we would argue that a gradual decline in net migration will continue towards the government's target of 100,000 per year from 2020. This would cause the UK population to be 1.4% lower than previously thought in 2030. We think other scenarios are unlikely - note recent positive migration data and evidence showing a large number of EU migrants applying for permanent residence in the UK. Finally, based on the mitigating factors discussed earlier, a large decline in net migration also seems unlikely at this point.
Impact on London's property market
Lower net migration and population growth could have several impacts on demand for London's property market:
- Demand for office space and housing might grow less rapidly overtime. London's housing demand is expected to remain strong for the foreseeable future given the failure of new supply to keep up with population growth.
- Affordability could be reduced, through the negative impact of lower population growth and productivity growth on London's GVA growth and households' disposable income growth. A decline in net migration could cause London's population to in effect age more rapidly, since migrant workers tend to be younger and have higher fertility rates than UK nationals. This would have an impact on the wider urban setting. It would have to evolve more rapidly so that the infrastructure, housing models and workplaces adapt to an older population.
- In a worst case scenario, the rapid loss of migrant workers in the construction sector from the EU would likely further reduce new project viability by worsening labour shortages and therefore raising labour costs. This would slow the growth trajectory of the housing market and present a challenge to operators seeking to build scale in the sector.
There is a high degree of complexity and uncertainty surrounding the factors influencing future migration flows, and their impact on economic and population growth. Our largely qualitative conclusions will be validated in due course as post-Brexit immigration policy becomes clearer and with the benefit of detailed quantitative modelling of different migration scenarios.
Immigration holds the key to London's demographic future and its standing on the world stage. Certain sectors that rely heavily on foreign-born workers, such as construction, are particularly at risk. And recent population projections suggest the risks to the outlook have become more skewed to the downside.