Rising affluence is changing household patterns in developing countries. Demand for higher-quality housing is increasing in step with the rise of the urban middle class. This creates opportunities for the construction industry, real estate services, retailers of household goods and services, and the mortgage finance industry.
- Rising affluence leads to changing household structure. Families have less children, the number of single person households increase and households become smaller, while dwellings become bigger;
- The demand for housing, household goods and services and housing finance (mortgages) is set to rise. The beneficiaries are household goods retailers and the construction, real estate and finance industries;
- Developing economies with a rapidly expanding urban middle class are the most attractive markets. Urbanisation is set to be fast in Asia Pacific, Latin America and Africa and the Middle East.
Rising living standards lead to a change in household structures:
- Rising affluence leads to a reduction in the number of children that parents have. The birth rate in developed economies of Western Europe was low at 11.9 live births per 100,000 people in 2006 and 14.0 in North America. Birth rates are much higher in developing economies such as Africa and Middle East (33.8) or Latin America and Caribbean (19.2);
- Only 32.7% of total households in Western Europe comprised of couples with children in 2006, compared to 51.0% in Asia Pacific and 54.3% in Africa and the Middle East, regions which are a lot poorer than Western Europe;
- The average number of people living in a household is closely related to living standards. Africa and the Middle East had the lowest per capita GDP and the highest number of people living in the average household (4.7) in 2006, as did Asia Pacific (4.1) and Latin America (4.0). The industrialised nations of Australasia (2.7), Western Europe (2.6) and North America (2.5) have much lower rates. The communist regimes of Eastern Europe (2.7) left a legacy of abundant housing and small households but also low living standards.
Economic growth is set to lead to rising incomes and increased demand for housing for a rising number of households, while household sizes are set to fall. The demand for housing, household goods, real estate services and household financing (mortgages) is set to rise in the most dynamic emerging markets.
Household patterns reflect the number of people in households:
- The majority of households in the developed economies of Western Europe (60.4% of total households in 2006), North America (60.2%), Australasia (59.9%) and Eastern Europe (53.1%) are single person or two person households. Particularly single households are an interesting and growing consumer segment because they spend a greater share of their income on leisure than families with children;
- The majority of households in Africa and the Middle East (62.8% of total households in 2006), Latin America (52.8%) and Asia Pacific (50.9%) have more than 4 inhabitants. These are families with many children. In poorer countries there tend to be more than one household member who contributes to the household’s income.
The result of large households in developing countries is cramped housing:
- Households in the wealthiest regions do not only have fewer occupants but also tend to be bigger dwellings. Households with more than four rooms accounted for 90.8% of total households in North America in 2006, while households in Australasia (87.0%) and Western Europe (68.7%) also have many rooms;
- Although households are much larger in developing countries, the size of dwellings are smaller. 77.6% of households in Asia Pacific had three rooms or less in 2006, while households in Eastern Europe (76.2%), Africa and the Middle East (62.8%) and Latin America and Caribbean (45.1%) also tend to occupy smaller dwellings.
Cramped housing increases the demand for more spacious dwellings once a country becomes more affluent.
The pressure of population growth
Population growth is putting pressure on housing provision:
- If current growth trends continue, the growth in the number of households is going to outstrip the growth in housing stock in Africa and the Middle East and in Australasia between 2006 and 2015. There will therefore be intense demand for new housing in these regions;
- Strong growth in the housing stock is also required in North America, Latin America and Asia Pacific to keep up with the rise in the number of new households.
Rising demand for housing, household goods and financing
The rising demand for housing has raised demand for financing, household goods, real estate and construction services:
- Strong demand for housing is set to bolster the construction industries of North America (5.4% of GDP in 2005), Latin America (6.1%), Asia Pacific (5.4%), Australasia (4.6%) and Africa and the Middle East (4.8%);
- Consumer expenditure on household goods is highest in North America (US$2,162 billion in 2005) and Western Europe (US$2,159 billion). Western Europe has seen the greatest rise in nominal US dollar terms 1995 to 2005 (140%), while Australasia (73.4%) and Asia Pacific (70.4%) also saw large increases;
- The rising demand for housing combined with economic reforms has led to a boom in mortgage financing in some countries. Legal changes in mortgage regulation in China in 1998 resulted in a rapid rise in housing finance provision. While only 1.3% of households had a mortgage in 1998, the rate had risen to 12.6% in 2006 and is forecast to grow to 23.4% in 2015. The increase in India is due to the economic boom, urbanisation, the expansion of the middle class and intense competition between banks and specialised mortgage lenders. 5.2% of Indian households had a mortgage in 2006, up from 3.8% in 1998. In 2015, 6.6% of all households will have a mortgage. Other countries, such as Egypt, who have both an expanding urban middle class and are reforming mortgage regulation, offer strong growth opportunities for mortgage lenders.
However, acceleration in demand for housing is not without risk. Several Western European countries have seen a boom in housing markets in recent years, particularly France, Spain, Ireland and the UK. Yet the European Central Bank’s (ECB) decision to increase interest rates from a low 2.0% in June 2003 to 3.75% in March 2007 is set to dampen the mortgage market and demand for housing in most Eurozone countries.
The low interest rate regime of the previous years may have led to over-pricing and the out-pricing of first-time buyers. A reduction in house prices and rising interest rates may leave many households in Western Europe with unsustainable debt.
Similar dangers exist if the housing markets in developing countries, which are currently booming, experience a downturn. Households in these countries are usually less economically secure and the bursting of a “house-price bubble” in developing countries would have much greater detrimental effect on middle classes there than in Western Europe because it would burden them with unsustainable debt.
Rising affluence and the expansion of the global middle class increase demand for housing, and change household structures in favour of larger dwellings for smaller households with less children:
- Indicators for the change in housing patterns are income growth, which results in the growth of the urban middle class. Particularly in urban areas, demand for housing – and higher quality – is set to rise;
- The global middle class is expanding, raising the demand for housing. Roughly 35-40% of the world’s population will have an income in PPP terms between $10,000 and $20,000 by 2015 – up from around 8% today;
- The most rapid rise in the number of urban households between 2006 and 2015 is set to happen in Asia Pacific (16.9%), Latin America (12.9%) and Africa and the Middle East (10.9%). These areas are set to see the biggest change in household patterns, as urban middle classes demands improved housing.