House Prices: Demographics Giveth and Taketh Away

Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:

[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline.

Takats tests this theory on international data on house prices and finds a significant link with population age.  He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:

He concludes that demographic trends boosted U.S. house prices by almost 40% over the past four decades. Given current population trends, however, his model predicts that aging will trim about 30% off of house prices over the next forty years.

I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices. But house prices will now face a demographic headwind–blowing at about 80 basis points per year–rather than a demographic tailwind.

These headwinds will be even stronger in Europe:

6 thoughts on “House Prices: Demographics Giveth and Taketh Away”

  1. The effect of demographics on asset prices, economic growth and inflation is far too often overlooked. in particular, I wish more economists would pay attention to the effect of demographics on growth and the lack of inflation in the Japanese economy rather than focus solely on their monetary and fiscal policy. This misplaced focus is, alas, intentional and due solely to the need to score points with respect to short-term domestic (U.S.) economic policy. This is unfortunate because the United States and virtually every other developed country will eventually face the same demographic issues that Japan is facing now. And yet our domestic fiscal policy, in particular, is based on the assumption that population growth can go on indefinitely to support ever- increasing levels of public debt. Instead of ridiculing Japan for their low growth rates, perhaps we should be studying how they have managed thus far to adjust relatively well to a difficult demographic shift. This shift will come to the United States and no one is bothering to admit it, much less prepare for it.

  2. I too appreciate this addition of common sense to the discussion, and like you, I wish it would contribute to the discussions of US economic policy. But the players need to score points at the expense of their opponents will not go away, so we need some other way to frame the conversation if it is to include this kind of wisdom.

    At the same time, I find it overly optimistic in one regard: its assumption that, aside from housing, all other variables in our future economic life (e.g., personal income) will go on growing as they have in the past. I think a good case can be made that we humans are approaching the finite capacity of the earth to sustain our kind of civilization, and if that is the case, we are approaching a point when everything will cease growing except our need to invent a new kind of economic system based on a steady state. Can that be done? I don’t know. But I know – and Stephen Hawkings’ latest statement reinforces the estimates by both the US Dept. of Defense and Lloyd’s Insurance – that natural resources are finite, and while human ingenuity is too, it lags the resource depletion by a enough time that we will be hard pressed to invent our way out of this situation. So I urge people thinking about policy to think on a more comprehensive scale – how can we adapt across the board to dwindling populations and a general requirement for no-growth economies?

    These are significant issues. Thanks to Maran and Takata in starting a very difficult conversation with some real information that we have overlooked previously. Let’s hope others will follow their example.

  3. 3 trends spell the future.

    Peak Oil

    Peak Aging


    As oil production costs increase due to our finding ourselves on the backside of the bell curve of peak oil, all transportation, food, drugs and any other petroleum related sectors, will either deal with cost inflation, or shortages due to unprofitable production, or both. This will slow economic growth or produce economic declines.

    Peak Aging reduces demand for goods, while increasing demand for services, but due to the relative poverty of the aged, such services must be cheap or they will not be availed. Peak aging means substanially less economic growth going forward.

    Outsourcing means reduction in incomes and destruction of the professional class as the middle class they feed off of becomes extinct.

    These 3 traits define the 21st century, and the picture they produce is of an economic plateau that soon becomes a rapidly descending hill.

    Barring a massive tragedy like a plague or a huge earthquake in multiple metropolitan areas, causing a destruction of workforce and creating a demand for goods and service in rebuilding, we are witnessing the Great American Decline.

    The question then is how much economic stress will the population put up with before reaching the breaking point that destroys or redefines the political system?

    Poverty will become a very real concern for a large amount of the U.S. population over the next 10 years. Economic destabilization of the middle class will be taught as the keystone of the 2nd American Revolution.

    Demographics matter.

    1. I have to agree.

      When I saw:

      I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices.

      I felt: head firmly in sand. At best, wishful thinking, at worst just another mouthpiece for TPTB.


  4. All well said.

    One note on Japan. They had an incredibly ‘fat’ distribution system and many monopolies that kept prices artificially high.

    Those inefficiencies have been slowly deregulated away.

    This, along with demographics, has had an incredible effect on prices.

    Further, super cheap China production has pushed prices down in most of the world. Many countries didn’t see deflation as other prices were rising at the same time (real estate, food, oil, commodities, etc.)

    One reason the West didn’t stop China from dumping junk in their markets is that it kept inflation low – so the financial shell games could continue.

    Daniel Kroc

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