Written by Andrey Vakulenko – MACON, EECFA Russia
Negative demographic trends in Russia are conditioning lower demand on the housing market in the coming decades. Due to the general population decline and aging, the number of most active home buyers will decline in the future. And this should – in the long term – lead to a reduced number of housing transactions.
Currently, the demographic situation in Russia is said to be extremely unfavourable. In July 2023, for example, only a little more than 110 thousand children were born, lower than in any July since 1945. This confirms that the country is experiencing a real ‘demographic hole’, and recovery is unlikely in the next decade.Population size and structure represent one of the main macro-drivers determining housing demand over a long period. Steady population growth leads to an increased number of individual households that over time begin to feel the need for own housing, so in virtually any housing market much demand is generated by young people purchasing their first home. The aging of the population, on the contrary, reduces demand for homes. Demographic factors are structural ones that operate long-term, over the horizon of decades, though. Now the market may show a rise in demand for housing, but if the long-term trend is negative, it will have a restraining effect and limit the potential for buyer activity. Often total population may grow or drop insignificantly, but its age structure can change significantly, determining the prospects for the residential real estate market.
Demographic trends in Russia yesterday, today and tomorrow
Russia’s population has undergone a steady downward trend in recent years. Over the past 30 years, the number of births almost every year has been way less than the number of deaths. The only exception was the period of 2012-2016 when the balance of indicators was minimally positive or near zero. In other years, there was a constant natural population decline. Record fertility rates during the USSR in the 80s have not been repeated to date: after a sharp drop in the 90s during numerous crises, the indicator recovered between 2001 and 2015, but another negative trend followed in 2015-2022 owing to the worsening macroeconomic climate and an almost constant decline in the real income of the population. And the pandemic broke the long-term trend of low population mortality, exacerbating the negative impact of decline in birth rates. Migration growth has also been insufficient in recent years and could not compensate for natural population decline, only slightly smoothing it out. Birth rates in each period determine the population size in a particular age group in the future, therefore, the current age structure of the Russian population is a consequence of past fluctuations in this indicator in different years.
In the future, the Russian population will likely decrease. As per the demographic forecast of the Federal State Statistics Service in Russia (Rosstat) and that of the UN Department of Economic and Social Affairs, population decline is estimated at 2%–5% until 2035. In addition, the age structure of the population will continue to shift towards the elderly. The graph on population structure by age always moves to the right: the rise in fertility in the 80s led to a higher population of people aged 35-49 now, the sharp decline in fertility in the 90s caused a fall in the population aged 20-30, and the recovery in the 2000s led to an increase in the number of under 20 age group. And with the current trend of decreasing birth rates, the elderly will surpass young age groups in the next decades.
What does demography have to do with the housing market?
As population in Russia is anticipated to decline slightly (2%-5% until 2035), this is unlikely to have a major impact on overall housing demand. But the lack of growth expectations is creating negative preconditions for the market in the long run. Also, the next decade should see a demographic shift in Russia: the share of 30-year-olds will plummet against the growth of older age groups. Such shifts directly affect the residential real estate market due to the different behaviour patterns of people of different ages in the housing market. According to a 2022 study by the Bank of Russia, Russians usually live in rentals until they are 30 and first home purchase is most often done after this age. This is also indirectly confirmed by the portrait of a typical mortgage borrower (DOM.RF study), whose average age at the end of 2022 was about 37.8 years. Mortgages in Russia are ‘aging’ under the influence of ongoing demographic changes, as seen in the dynamics of the average age of the borrower and the share of young people in the total number of borrowers.
In general, the main stages of human activity in the residential real estate market are as follows:
- 20-29 years of age: rental housing. Until 20 young people live with their parents and then separate due to studying or working. Buying a home immediately is accessible to very few, so they rent flats.
- 30-39 years of age: purchasing a first home. At this age, families are established, children are born. The first home is usually purchased to ensure comfortable living conditions.
- 40-49 years of age: improving living conditions. After 40 people reach the peak of their career and financial well-being, enabling them to improve living conditions. This can either be an increase in space or change in the home (moving from a flat to a house).
- 50-64 years of age: optimization of housing. Children grow up and live separately, pushing this age group to optimize housing (moving to a smaller home or to another city/region).
- 65 years and older: transfer of housing by inheritance.
Considering the predicted age structure of the population, in the coming years Russia will see the largest and most active demand group (first home buyers/those aged 30-39) steadily decline. Population structure will be redistributed towards the age groups of 40 years and older who are considerably less active in the market. This will certainly be negative for housing demand. At the same time, negative trends will to some extent be smoothed out by the following demographic factors:
- Expected increase – after a long decline – in the number of young people aged 20-29 in 2026-2035. They mainly focus on rentals, but demand for rentals will push them to be more active in home purchases mainly in large cities that are educational and economic centres.
- The 2020-2021 census showed that the number of households consisting of one person is steadily increasing: their share is now about 42%, almost twice as high as in 2022 (22%). More single people will need more housing units, supporting housing demand.
- Great need for new and high-quality housing. Residential volume per capita in Russia is about 28 sqm/1 person, way lower than in developed countries, and lower than the target values of state housing programs (min. 30 sqm/person). Low income, coupled with an often outdated and low-quality housing stock, creates need for more frequent improvement in housing conditions.
Having these in mind, the ‘aging’ housing market is not a disaster, it is rather a structural factor that we will need to adapt to. Nonetheless, the gradual contraction of the traditionally most active demand base and the overall downward trend in population will put pressure on the market. An additional challenge for housing developers will be to adapt the product to the needs of older buyers whose number will grow in the near future.
Residential forecast for Russia is available in the latest EECFA Forecast Report Russia. For orders and sample report, please visit eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Russia.