The 2015 Intergenerational Report was released this week, so let’s see what we can learn from it in four parts.
Part 1 – Population and the economy to expand
Australia’s population is projected to change significantly and grow over the next 40 years and to increase from less than 24 million to today to 39.7 million by 2055.
Master Builders Australia estimates that we will need 9 million new homes over that time, but even these population forecasts may be on the conservative side, as I will explore below.
The changing size and structure of the Aussie population is very important as it influences how quickly our economy and our incomes grow, and therefore the rate at which our future living standards will increase.
Expect low interest rates for quite a while to come!
Part 2 – Population structure to change
The structure of the Aussie population will also continue to change with Aussies projected to live longer and have one of the longest life expectancies in the world.
By 2055, life expectancy at birth is projected to be more than 95 years for men and more than 96 years for women, while there are projected to be approximately 40,000 people aged over 100, which is a huge increase.
Improvements in health also mean that Aussies are also more likely to remain active for longer, presenting great opportunities for older Aussies to keep participating in the workforce and community.
This has massive implications for the demand for health and aged care services and retirement incomes…which should give you a clue as to what stocks to own!
A greater proportion of the population will be aged 65 and over and the number of Aussies in this age group is projected to more than double by 2055 compared with today.
The proportion of Aussies aged 85 and over will grow rapidly – in 1975, this age group represented less than 1 per cent of the population, or around 80,000 people, but by 2055, it is projected that nearlt 5 percent of the population, or nearly 2 million Aussies, will be aged 85 and over.
There will be fewer people of traditional working age compared with the very young and the elderly, a trend which is already visible to those with their eyes open!
Part 3 – Migration and natural growth assumptions
Fertility is assumed to remain at around the 2013 rate of 1.9 births per woman.
The total fertility rate has remained relatively steady since the late 1970s, and it is important therefore to recognise that what a vital role net overseas migration plays in population projections.
Based on patterns of migration, fertility and life expectancy (mortality), Australia’s population is projected to grow at 1.3 per cent per year, slightly below the average growth rate of the past four decades.
In these projections net overseas migration is expected to decline to just 0.5 percent which looks dubiously low to me. Were this to occur, the population would reach 39.7 million by 2055, up from approximately 23.9 million today.
Net overseas migration is mainly comprised of permanent migration (including skilled and family) and temporary migration (including temporary skilled and students).
The central assumption of the 2015 Intergenerational Report is that net overseas migration will be 215,000 people a year beyond the current forward estimates, a figure which is reviewed each year in the context of the Budget to reflect evolving economic and social circumstances.
Net overseas migration is the net gain or loss of population through immigration to Australia and emigration from Australia – and note how expectations of immigration have increased over time.
For the central scenario presented in the 2015 Intergenerational report, net overseas migration has been assumed to be 215,000 per annum from FY2019.
Yet in the 2002 report, the long-term net overseas migration assumption was 90,000 persons per annum and by the 2007 report, the assumption was 110,000, and in the 2010 report, the assumption was 180,000.
Variation in net migration outcomes reflects changes in both out-migration, influenced by economic circumstances domestically and overseas, and in government policy regarding immigration into Australia.
My observation here is simply this: note the trend!
Part 4 – Why immigration may higher than we think
The report tells us that Australia’s permanent migration intake is determined by government policy (including the mix between skilled and family reunion places) and is subject to review each year as part of the Budget process.
As such, actual population outcomes over coming decades will depend upon the future immigration policy settings of successive governments, as well as Australia’s relative economic performance.
The following excerpt from the Intergenerational Report betrays why immigration appears to me to be likely to soar (my bold):
“Lower levels of net overseas migration would lead to lower population growth rates over time and, therefore, lower economic growth.
Historically, immigration has been an important source of labour supply for Australia. Since at least the 1980s, immigration has made the largest contribution to growth in Australia’s working age population
As permanent migration has increased since the mid-1990s greater emphasis has been placed on skilled migration and the choice of skills has been made largely demand-driven by employers, supporting economic growth.
Migration also has an impact on the age distribution of the population. Migrants, on average, are younger than the resident population. Migration reduces the average age of the population and slows the rate of population ageing. This increases the proportion of the population that are of working age and raises aggregate workforce participation, increasing economic growth.”
In FY2014, around 88 per cent of migrants were aged under 40 years, with around 54 per cent of migrants were aged from 15 to 29 years.
Summarily, immigrants are young, they work and they pay tax.
Based upon that, I expect net overseas migration into Australia to remain, very, very strong over the next four decades.
Whatever your view on the growth assumptions, it is abundantly clear from the Integenerational Report that Australia’s population is going to expand massively by 2055.
We also learn that:
- lower immigration would lead to slower economic growth
- lower immigration would lead to an ageing population
- lower immigration would lead to lower participation rates (with an adverse consequences the tax take)
Considering these ideas, does it seem to you that immigration might be stronger than the long, slow decline to just 0.5 percent of the population per annum used in the projections?
It does to me.
What does this mean for investors?
Given the changing size and structure of the population,here are a few points on how I plan to structure my investment strategy:
(i) recognise that a huge abundance of wealth can be created over the coming decades using sensible investment strategies with a long-term focus;
(ii) depending upon when you were born you might live to be 100 years old, so invest in as many quality assets as you can which you never have to sell;
(iii) buy, hold and invest for the long term – plenty of websites promote market timing or trading ideas, but are they really creating wealth with proven strategies, or just guessing
(iv) don’t buy crap, which includes small cap stocks with a low survival rate or poor quality properties in poor locations – most migrants will be headed for the four largest capital cities and south-east Queensland, and within those capital cities employment growth and population growth is demonstrably centralising;
(v) own quality properties with a high land value content (i.e. not high-rise units or dwellings where bedrooms are located 3 metres from a national highway…use some common sense) in Sydney’s inner ~15km and Brisbane’s inner ~5km. Experts on the Melbourne and Perth markets can advise you on the equivalent markets;
(vi) own diversified healthcare stocks, or better still, own all of the healthcare stocks worth owning; an
(vii) invest regularly in a very well diversified portfolio of industrials and financials, or even simply the index itself.
Australia will be a land which presents many investment opportunities over the next 40 years – the challenge is to grasp them.