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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 Előd 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 percent 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 per cent compared to neutral demographics. In Canada, the comparable figure was around 20 per cent, in New Zealand it was around 30 per cent, and in Ireland it was close to 65 per cent.

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 percent 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 per cent compared to neutral demographics; by around 45 per cent in Canada and New Zealand; and by more than 55 per cent 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 ageing 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.”

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5 Comments

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Energy Wonk wrote:

Karen, great piece (See How ageing hurts house prices, August 18).

As China falls over and global deflation sets in we will all learn that house prices do indeed go down in Oz.

18 Aug 2010 5:55 PM

Ralph Cartwright wrote:

While don't disagree with the premise that different age cohorts will have different spending patterns, I think it is a stretch to suggest this will have a marked influence here on property prices (See How ageing hurts house prices, August 18).

For instance, where are all these aged people going to be living? They still need a roof over their heads.

Will they live with children? Then the children will buy up bigger houses to accommodate them and prices will remain exactly where they are.

Will they downsize? Then they will buy up all those smaller houses from children buying bigger for their parents!

Australia is undoubtedly getting older as a nation, but our birth rate is increasing, as opposed to the opposite for most other OECD countries.

Finally, much Australian research points to the opposite happening. As people age, they want to stay exactly where they are.

19 Aug 2010 1:15 PM

Fay Helwig wrote:

This is a good reason why Australia should continue to take young skilled immigrants. These are the people who are needed to buy the homes of the baby boomers when they retire into nursing homes (See How ageing hurts house prices, August 18).

19 Aug 2010 1:28 PM

Brent Walker wrote:

Japan's lost decade(s) are largely due to demographic issues through not having a post second world war baby boom and not preparing for this (See How ageing hurts house prices, August 18).

In the early to mid 1990s I did a lot of demographic work in conjunction with research on future health care costs. Initially I was sceptical of the baby boomer theory so I got the ABS to increase their projections from 40 years to 60 years so to prove that I was right to be sceptical.

Even when nearly all the baby boomers are dead (around 2050) the demographic changes purported to be caused by them will still be with us. This is because fertility rates are the issue and to a lesser extent immigration rates. So broad policies which improve the fertility rate and keep the immigration rate relatively high reduce the demographic bulge at the older ages. The Australian government now recognises this.

There is another issue that is going to change the effect of the squarer population pyramid. This is that health care and environmental changes are rapidly reducing mortality rates at the older ages. the health status of the older population is consequently improving and this will eventually delay and shorten the time that older people will become dependent on the balance of the population. However there is a lot of work to do in this area yet. We don't look after ourselves nearly as well as we should and we have an aged based retirement mentality that has to change to a future longevity based retirement mentality.

Back in the early 1990s I proposed to the Institute of Public Administration that they should promote policies that encouraged fertility. It was a public forum and women began standing on chairs and throwing their shoes at me. But 15 years later we now have those policies.

I hope it doesn't take another 15 years before we adopt more enlightened future longevity based retirement and welfare policies – but they will come because this is the only sensible way to combat ageist welfare policies.

19 Aug 2010 2:35 PM

Robert Sherlock wrote:

Australia's population is growing less (in numbers and percentage) than the state of Texas! A suburb in Houston has a average household income of $125,000 and an average house price of $215,000 (See How ageing hurts house prices, August 18).

Texas never had a boom and never had a bust. Only major cities that had a 'housing shortage' crashed.

20 Aug 2010 6:56 AM

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