Governments of advanced economies face a difficult task in coming years, as they grapple with the problem of rising health costs and falling tax receipts caused by a rapidly ageing population.
But housing prices around the world will also feel the chill winds of rapidly ageing populations, according to a very interesting recent Bank for International Settlements study written by the economist El?d Takáts.
The study points out that housing prices are affected because people’s consumption and savings patterns change as they age. People tend to borrow when they’re young, and then, when they hit middle age, their focus shifts to repaying debt and saving for their old age. Younger people typically save for old age by buying assets, while older people sell their assets to finance their retirement. The relative size of the group of asset buyers (the young), compared with the group of asset sellers (older people) influences asset prices.
In particular, the study says, “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, i.e. the subsequent young generation is relatively smaller, then asset prices decline.”
The study notes that the issue of rapidly ageing populations is most marked in the advanced economies. The old age dependency ratio – the ratio of old to working-age population – is expected to almost double in the United States by 2050, and the ageing of the population is even faster in Germany and Japan. But some emerging countries are not far behind. For instance, the study notes that by 2025, China will be older, in terms of median age, than the United States.
The study found that demographic effects played out strongly in the property markets of English-speaking of countries – particularly the United States, Australia, Canada, New Zealand and Ireland – although the effect was less in the United Kingdom.
“In English-speaking countries it seems that Baby Boomer purchases drove up house prices in the past, while their sales will drive real house prices down in the future. In the past 40 years, these economies have experienced the positive impact of ageing. As baby boomers reached working age and started buying housing, they pushed up property prices.”
According to the study, “the Baby Boom generation increased real house prices by around 40% in the United States compared to neutral demographics in the past 40 years. This corresponds to around 80 basis points per annum demographic tailwinds.”
A similar pattern was evident in Australia, where the study estimates that other the Baby Boom generation increased real house prices in Australia by between 25 to 30% compared to neutral demographics. In Canada, the comparable figure was around 20%, in New Zealand it was around 30%, and in Ireland it was close to 65%.
But these demographic winds are now shifting direction. Using United Nations population projections, the study estimates “these economies are projected to experience the negative impact of ageing from 2010 onwards. As Baby Boomers age, they would reduce their housing stock – and thereby depress prices.”
According to the study, demographic factors will reduce US housing prices by around 30% compared to neutral demographics in the next 40 years. This corresponds to around 80 basis points per annum demographic headwinds. Other English-speaking countries are expected to face similar headwinds, although again demographic effects will be more muted in the UK.
For instance, the study estimates that the effect of an ageing population is likely to reduce Australian housing prices over the next 40 years by between 25 to 30% compared to neutral demographics; by around 45% in Canada and New Zealand; and by more than 55% in Ireland.
The study predicts that the demographic headwinds facing continental Europe will be stronger than those facing the English-speaking countries over coming decades, particularly in Portugal, Spain, Greece, Germany and Italy. And rapidly aging Japan and Korea will also feel a strong demographic pull on housing prices.
It’s important to recognise that the study is not forecasting real house prices, but is estimating the effect of demographic changes on real house prices. Italy and Korea have managed to enjoy strong rises in housing prices despite substantial demographic headwinds.
Other factors – such as constraints on the construction of new housing – can be extremely important influences on housing prices. The study also acknowledges that it is notoriously difficult to predict future demographic and lifestyle changes. For instance, demand for housing may increase as a result of falling household size (as marriage and cohabitation is delayed, and the divorce rate rises), or if there is a trend for people to own a second home, and this will support housing prices.
On the other hand, if government budgetary pressures lead to sharp cuts to pension payments, older people may have to run down their assets more aggressively than in the past, if government budgetary pressures in advanced economies which would exacerbate the negative impact of ageing on asset prices.
Despite this, the study concludes “the estimates suggest that real house prices will face substantial headwinds over the next 40 years due to ageing. Though the results do not imply absolute real price declines, they suggest that in the next 40 years house prices in advanced economies will face a more difficult environment than in the past 40 years.”
This article first appeared on Business Spectator.
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