Double trouble: the path to 52 million Australians

In the inaugural episode of our podcast Navigating the Noise, Louise Watson, Head of Natixis Investment Managers Australia & New Zealand, joins demographer Simon Kuestenmacher to explore Australia’s burgeoning population and the potential ramifications this will have for our society, economy and investment decisions.

Simon unpacks key data on:

• Population doubling
• Centralised growth trends
• Social pressures on infrastructure
• AI & automation fears
• The Baby Boomer cohort

Louise Watson: Hello and welcome to the first episode of Navigating the Noise, a podcast by Natixis Investment Managers Australia where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Louise Watson, Country Head for Australia and New Zealand, and today I am joined by Simon Kuestenmacher. Simon is a demographer, an expert in demographic trends and data.

He has some fascinating insights into the way Australia’s population is changing and the implications this has for our society and economy and so for a variety of investments. You might have read Simon’s columns in The Australian or the New Daily or seen him on a variety of media and social media.

I enjoyed my conversation with Simon so much that it ended up being a bit long for one podcast so we split it into three parts. The first part is on the doubling of Australia’s population, the second part is on Australia’s business model and the third part focuses on intergenerational wealth transfer.

Let’s dive straight into the first podcast.

Simon, one of the topics that we've been talking a lot about with our clients and something that you've done a lot of work on is the doubling of the population. And you've said that Australia's population will double from 26 million to 52 million people, you just don't know quite when that will happen. So how can you be so confident in these numbers and when it will happen and what are the factors which will decide when this happens?

Simon Kuestenmacher: Exactly. So, forecasting the Australian population, if we do this only a decade or two out is relatively simple task because we know exactly how many babies we're going to make each year. We know how many of us won't make it until the next year, and as a nation, we dictate the migration intake. So overall, a decade is no problem.

Once we talk about the doubling of the population, we talk about somewhere between maybe 55 and 105 years, but it will most likely happen (assuming over this time frame Australia still remains an attractive destination for migrants) because the vast majority of our population growth, at the moment, over 2/3 comes from migration rather than making more babies in Australia. So that's a given.

We then need to come up with most likely scenarios of how fast we age, how fast we increase or slow down our migration intake, and all those plausible scenarios. There's nothing that says faster than 55 years and nothing that says slower than 105 years. My best bet if you're playing along at home, is about 65 years from today.

Louise: So, what does it actually mean for Australia if our population doubles?

Simon: It means first and foremost that we would actually be honest about the prospects of population growth. It is quite easy to say, oh, we need to slow down migration growth because, you know, we have a housing shortage, housing crisis. So, if we just stopped that, maybe we would then have a chance to catch up and maybe then we would create a better life for all Australian residents. That would be lovely.

But then you create the question; well, fair enough, so we stop migration, or we minimise it, we slow it down, but what type of migrants are we not taking in anymore?

A third of all migrants are international students. Maybe you say, oh, we've been doing this for too long and we cancel all of them, half of them. Then you need to charge more taxes in order to pay for university, because international students are underwriting that. About a third of all…international migrants, are skilled migrants, so people that come here because they have a job that is on our migration list. We literally order those people into the countries because we say we have a shortage of structural engineers, of mining workers, of God knows what it is. But we take those people in because you have desperate needs in those fields.

That leaves about a third, you could cancel some of those workers, you could not take them in, but then you'd need to deal with the consequences and the labour force. What kind of sectors are we willing to slow down? Maybe a slowdown of migration would lead to an increase of productivity magically, because these sectors can then throw money at innovation and we would then automate work more.

Maybe: AI is always thrown around as a magical term here. But I don't see that all that likely because the vast majority of wealth in Australia is created through four sectors that are not all that easy to automate.

We're making most of our money with mining, with agriculture, with international education, and with tourism. That's how we make the vast majority of exports. And these industries, yes, there's automation, there’s self-driving trucks on mine sites, but overall, we need humans in those sectors and we cannot outsource those jobs at scale to machines. So we'll need quite a few workers in those industries just to make sure that we increase our productivity.

That then leaves only a third of all migrants that you could potentially, ah you know, get rid of if you wanted to move to a slow migration approach, and this is made up of refugees, asylum seekers and mostly family visas. So these are visas handed out to the husbands and wives of skilled migrants, largely, and every now and then there is a family reunification where you get an elderly relative into the country.

So, we do have legal humanitarian obligations for migrants. We signed accords there, for asylum seekers, so we can't really stop that. So, you could maybe make it a bit harder for families to come. That's about it. That is the most likely scenario where you cut off migrants and I don't think that's plausible.

Louise: Migration is such an important part of Australia's history and culture, why do we take in so many migrants?

Simon: We are taking in migrants because at the moment we are already experiencing a big fat skills shortage. That skills shortage is felt in any industry across the whole country. Every industry body is lobbying for their particular jobs to be added to the skilled migration list. They talk to the Feds because they want more workers. So how likely is it that this is going to stop?

Louise: That's a great point, Simon, and we're talking about some really big numbers here, you know, doubling our population. How confident are you that Australia is set up to manage the social and I guess pressures on our infrastructure going forward?

Simon: Well, at the moment, we're not doing well, most likely because we have probably estimated 20 years' worth backlog of infrastructure development. What we allowed really, ever since these Sydney Olympics, as a rough line in the sand, we allowed our population to grow at a faster rate than we added infrastructure and housing.

At first, this wasn't all that annoying because infrastructure has a bit of a carrying capacity. You don't immediately see the negative impacts of building, adding more people than you add infrastructure because the existing infrastructure can carry you quite a long way.

But, housing. Housing because we didn't build enough housing, nowhere near enough, that at first was a rather nice thing, because the two-thirds of the Australian population that owned the house, they made more money with it. Housing was a sure-fire financial investment. So, everybody won.

There was kind of nice up to the point and I would say we only recently reached this point where housing became so ludicrously expensive that for many young people it just doesn't work anymore. And now as a side effect of this, you have social discontent. You have people feeling screwed over by the state. They feel like they're not being given a fair go in life because they work hard. They're dual income families, working full time and they can't afford a house.

That is an essential promise of Australia, that if you work hard, especially if you're a dual income household, that you can do this. That is a bit more severe than just a couple of people being grumpy. This is about, we are threatening the fundamental belief in democracy being a great system.

So, there is a bit of, and I don't want to over-dramatise this because we're not moving into some ludicrous dictatorship or authoritarian state. We are far from this. But we are slowly eroding democratic fundamentals by making sure that housing cannot work or isn't working for everyone. It can, and we are in the long run already seeing positive developments of why housing will become more affordable. Not easily, beautifully affordable, but less terrible than it is now.

Louise: And I guess that's a great segue way to talk about financial advice and the financial services industry. You know, again, when we talk about doubling the population and what this means for financial services and you mentioned the skills shortage and the skilled migration list and one of the things that we talk a lot about in our industry is the need for financial advice and good financial advice and attracting financial advisers to our industry. Is that something that you'll see going forward as the demographics change, as the population doubles?

Simon: Well, so the doubling of the population is a long way away. If you look at the more immediate future for financial advisers, say the future is outrageously bright. Because traditionally you would start onboarding people as clients, maybe in their 50s, usually either when they had a health scare or when they did inherit quite a bit of money. Then you feel the need to actually manage all this wealth, plus you have juicy incomes by then if you had a good career.

That segment of the people in their 50s isn't growing all that much in the coming decade because you have the relatively small Gen X cohort moving into that 50s cohort. You do, however, have a very, very rich baby boomer cohort, so people that are just before retirement and just after retirement age. They are richer than ever. They have time. They are asset rich. They are a dream customer cohort, so there is a huge, huge growth in this cohort and the forward-looking financial advisor is very much looking at the kids of their baby boomer clients.

If you want to grow your clientele, start inviting all the millennial kids of your existing clients to events, to meetings, throw events particularly targeted for them, you know. Educate them about finances, about the broader Australian societal context. All these kind of events, provide them for free; costs you a bit, but not all that much and you will then more likely get clients for life because they will stick with you.

You then actually get the chance of essentially multiplying people under service because if Mum and Dad die, and you get their two or three kids, you have more clients; you have more families under management.

So all of this stuff, millennials, millennials, millennials, they tend to be too young at the moment to be the traditional clients, but you can grab them right now and they will be inheriting the wealth.

Louise: That's really great advice, Simon. Thank you. And I think we're seeing this not just in our cities, but also in our regional areas as well, which will continue to grow.

Simon: Ohh very much so. So, what happened in the last decades is we saw centralised population growth. We are the most centralised country in the world in a sense that there's no place on the Earth where a higher share of the population lives in just the five biggest cities.

Over two-thirds of the population lives in the Big 5 cities. That is, is mad. It's a result of traditional growth of states that are far away from each other, and you build each state the same way; you build a big fat capital city, and then you have up to a handful of decent-sized satellite cities, and then you have small tiny places that you need in order to service the agricultural communities or mining communities. That's it.

So, there's no need to have multiple big cities in a state, but we reached a point where, you know the big cities, Melbourne, Sydney stopped functioning in their single CBD set up at around four, four-and-a-half million people. It's just too much.

And what we then do, and all the planning documents in the whole country point this way, we want to decentralise population in each state and that's what we are doing. That's what we're trying to do and at the very least, but in order to decentralise populations, you do need to decentralise jobs.

We might have felt a bit too optimistic during the COVID lockdowns, that decentralisation is occurring because we saw also many people moving away from the cities to the urban fringe to the regional cities that are still in commutable distance to our drivetime radius of the CBD. And then we, we extrapolate it and said, ah oh, no, no, this will, people are shunning away from the big cities, but they're not.

There is big benefits of living in a big city; they're not going to go away. If you want to decentralise population, you need to make sure that the CBD is relatively purposeful, that there is a certain kind of, you know, professional service type jobs in the CBD and that you then create additional job clusters outside of the CBD. A health hub, for example, a manufacturing hub and you then have the ecosystem that supports this kind of cluster locally and then you can decentralise population.

We are slowly moving towards this, but this is a slow, slow march. The city is not losing any attractiveness, so don't sell your interest in inner-city developments, I know particularly that people get nervous about their office towers that they might be owning, and invested in, and how they are just a waste of money, a waste of space, that we should board them up, let nature take over like in ‘I am legend’.

But that's a temporary thing. The office towers as of today are particularly uninteresting because people work from home at such a high degree, then they are probably, you know, over-mortgaged, if you will. So they carry a lot of debt, but in the long run the office towers will be very, very attractive again.

And then in a counter-intuitive sense, the way, the reason why they will be attractive again has largely to do with AI. Because first and foremost, we grow our cities, so more people, even if you don't go into the CBD on a on a daily basis, if you have more people in a city, a certain share of them will go into the city, into the office hours every single day. Sooner or later, we'll fill up the office towers again.

But most importantly, AI changes the way we work, and AI will not kill jobs really, it will make certain tasks much faster. Those technical tasks, writing documents, creating PowerPoints, Excel and so forth, that will be faster. That will not lead to office workers, leave the office at 3p.m. Work finds a way to fill your day, and so we will spend our working day with more interpersonal tasks and those interpersonal tasks, yet again, they’re best done in the office.

So ultimately, the office towers will be busy again. It will take a decade or so, but they will be nice and busy. And then that will slow down the current impulse towards decentralisation.

Louise: I think they're really interesting data points for our clients and certainly the financial advice industry to consider as well as our superannuation funds who are trying to improve their service model to their members.

Thank you for joining us for part one, I hope you’ll tune back in to hear parts two and three of my conversation with Simon and we’ll also be bringing you other podcasts from our global collective of experts to help you make better investment decisions.