Investing in Shrinking Population

The Real Estate Espresso Podcast

Investing in Shrinking Population

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Investing in Shrinking Population

Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

We’re accustomed to the idea of growth. We love it when the wind is at our back and progress is effortless. We’ve experienced a lifetime of growth. If a growing market is an underlying assumption, then most people are completely unaware that they’re operating with the assumption of growth. Growth becomes a law of nature, almost like gravity.

What would change in your strategy if you needed to win in a shrinking market?

We know the most developed economies have extremely low fertility rates. We’re not making enough babies to sustain population.

Well, Canada experienced the first major drop in population this past quarter, outside of a small blip during the height of the pandemic. This quarter is the first time that Canada’s population has declined in at least the last eight decades. That’s based on historic data from 1946.

Canada’s population fell by 76,000 over the third quarter, the largest decline this country has seen in records dating back to the 1940s, and it’s the result of major policy changes by the federal government’s attempt to curb immigration. The decline was driven by a drop in the number of international students. More than a year after the federal government started imposing caps on study permits, the country’s population fell by 0.2 percent in the third quarter of this year after almost a year of near zero population growth, and the current population stands at 41,575,000. That’s according to new estimates from Statistics Canada that were released Wednesday this week.

The shift in this demographic indicator is a sign that Ottawa’s moves to control immigration after years of massive growth, that change in policy is starting to work. The federal government set a goal of reducing the number of non-permanent residents in Canada to five percent of the total population by the end of 2027. That number sits at 6.8 percent and compares with 7.3 percent in the past quarter.

There were close to three million temporary residents in Canada in July. Today that number is at 2.85 million, and the stated goal is to reduce that number to about 2.1 million by the end of 2027. If we go back to 2021, there were approximately 1.36 million non-permanent residents in Canada, roughly 3.6 percent of the population. And by October of 2024, that number had increased to over three million people, or about 7.6 percent of the population.

This trend is not limited to Canada. The US administration has set a much more stringent immigration policy over the last year, and these policies continue to evolve, with citizens from a total of 39 countries now barred from entering the US even as visitors. This is largely a reaction to the near-open-doors policy of the previous administration. Now the US has taken the step of completely closing the door to any asylum seekers.

The British government is planning to end automatic permanent residence for refugees and would require them to reapply every two-and-a-half years to stay in the country. Britain plans to make refugees wait twenty years for permanent residence.

Now, to be clear, there have been abuses of the system. Perhaps changes are needed to send a message to those who are merely seeking a better economic condition. The borders should remain open to genuine refugees who are seeking refuge from persecution.

Now, the traditional argument is that foreigners are taking our jobs. The fact is a shrinking population means a shrinking economy. And a shrinking economy does not create more jobs.

The latest employment numbers are out for the US economy this week. The US population shrank again this quarter. But there were also significant job losses in several sectors of the economy. Leading the losses were transportation and hospitality. Construction was also a bellwether of the economy, and there have been huge losses in particular in residential construction. They have been offset by massive investments in data centers, so that’s masking the situation in the housing market.

The bright light in employment is in healthcare, and that sector continues to hire more people than any part of the economy. With an aging population, I guess this makes sense. So in this environment there will be winners and losers.

Now, the US and Canada are not strangers to shrinking population. Internal migration has caused population to shrink. The wealth has been at the expense of losses in the Rust Belt. Detroit has lost more than half its population since the 1970s. Cleveland has lost 60 percent of its population since the 1950s.

Is the Cleveland market a great place to invest? Well, a few people think so, but I also know a lot of people who have tried and failed in Cleveland. Just because something is cheap to purchase doesn’t mean it’s a bargain.

I personally would not invest in a city that has consistently lost 10,000 to 20,000 residents a year. It creates a lot of vacancy and downward pressure on rents, and when rents fall and expenses increase due to inflation, that combination can be toxic for investors.

Japan currently has 9 million vacant homes. That’s nearly 14 percent of the total housing stock. We only need to look at Japan and parts of Europe to see our future. Immigration is the pathway to maintaining population and to maintaining economic growth.

I’m hopeful that these reductions are short-term reactions to periods of excessive growth, and that both countries, the US and Canada, will return to a more normalized immigration policy that recognizes the significant necessity and long-term benefit that comes from a functioning immigration policy.

As you think about that, have an awesome rest of your day, go make some great things happen, and we’ll talk again tomorrow.

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