Slower population and labour force growth could weigh on housing demand and future policy choices
Lower net immigration is set to drag on UK economic growth and blow a large hole in the Chancellor’s fiscal headroom, according to new analysis by Oxford Economics – with potentially important implications for housing demand, the mortgage market and future policy decisions.
Andrew Goodwin, chief UK economist at Oxford Economics, told Mortgage Introducer:
“We think the OBR will have to cut its population assumptions in this autumn’s Budget because net immigration has been much lower than it anticipated. Based on migration assumptions we think are more realistic, around £19bn of the £22bn of headroom from the last Budget could be eroded. So this issue has the potential to force the government to have to take more difficult decisions on tax and spending.”
Net migration set to fall to lowest level in decades
Oxford Economics argues that the UK is moving from an era of very high net inflows into one of much lower, politically constrained migration. After recent sharp falls, the consultancy expects net immigration to drop to levels not seen since the late 1990s and to remain subdued for the rest of this parliament.
On their projections, the UK population in 2030 would be materially smaller than current official assumptions imply, because fewer people are expected to move to the UK over the next few years than the Office for National Statistics (ONS) has built into its central forecast. That, in turn, means a smaller labour force and less scope for growth driven by rising employment.
Goodwin and his team argue that the political climate – with both government and opposition talking about keeping immigration down – makes a rapid rebound in net inflows unlikely, even if some categories such as overseas students remain relatively resilient.
OBR growth downgrade could wipe out Budget headroom
Because the Office for Budget Responsibility (OBR) bases its fiscal forecasts on official population projections, any reassessment of likely migration flows quickly becomes a question of growth and borrowing.
Oxford Economics expects the OBR to bring its assumptions more into line with the weaker migration picture at an upcoming fiscal event. If it does so, Goodwin reckons the watchdog would need to mark down its estimate of the UK’s “potential” growth rate in the target year for the fiscal rules.
That would leave the Chancellor struggling to maintain the buffer that was created at the last Budget. Oxford Economics’ calculations suggest that, on more conservative migration assumptions, the vast majority of that headroom would disappear, leaving little room for pre‑election giveaways and increasing the risk of future tax rises or spending restraint.
In the short term, the firm does not expect a dramatic shift in the Bank of England’s stance, noting that over its usual forecast horizon lower population growth tends to offset itself on the demand and supply side. But the fiscal arithmetic gets progressively tougher as the impact of weaker population growth on tax revenues accumulates.
Ageing population, weaker labour supply and productivity risk
The analysis highlights how demographics are becoming a structural headwind for the UK economy.
The share of over‑65s in the population is already close to one in five and is projected to climb further over the coming decades. With fewer working‑age migrants than previously assumed, Oxford Economics believes the age profile of the population will skew older more quickly than current official projections suggest.
The firm’s modelling shows that the contribution of labour supply growth to overall economic potential is set to weaken in the years ahead, even with previously legislated increases in the state pension age. Beyond that, scope for further large and rapid changes to pension rules is politically and practically limited.
That puts more pressure on productivity to do the heavy lifting. Yet productivity growth has been sluggish since the global financial crisis, and Oxford Economics is more cautious than the OBR about how quickly technologies such as artificial intelligence will translate into broad‑based efficiency gains.
Over the very long term, the consultancy expects the level of UK GDP to be significantly lower than the OBR does, mainly because it assumes weaker underlying productivity growth rather than because of migration alone.
Implications for housing and mortgage markets
For mortgage professionals, the key message is that the demand environment is likely to evolve in quieter but important ways:
- Softer underlying demand in past high‑migration hotspots: Years of strong net inflows helped support household formation and housing demand, particularly in major cities and university hubs. A sustained period of lower migration points to less upward pressure on transaction volumes and prices in some of those areas.
- Rental versus purchase demand: With tighter rules on work and dependant visas but a continuing reliance on international students, rental demand in certain locations is likely to remain robust even as the pipeline of potential first‑time buyers from recent migrant cohorts thins out.
- An older borrower base: A faster‑ageing population and slower labour force growth will tilt the customer mix further towards older homeowners remortgaging or restructuring debt, and away from large numbers of younger first‑time buyers. This reinforces the need for products tailored to later‑life lending and more flexible affordability approaches.
- Policy and affordability risk: If reduced migration forces the OBR to downgrade its growth outlook and the government responds with tighter fiscal policy, that could weigh on household incomes and confidence over time, even if interest rates are not directly affected in the near term.
For now, the shift in migration is helping to take some of the heat out of parts of the housing market that were previously buoyed by strong inflows of workers and students. But Oxford Economics’ work suggests the more profound story for lenders is the combination of slower population growth, an ageing borrower base and a tighter fiscal backdrop – a mix that argues for cautious growth assumptions and continued innovation in how the industry serves a changing client demographic.
