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Peter Hun

No Demand, Demographic Factors Will Push Western House Prices Down

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House prices to be forced down for the next 40 years ...

Geriatric asset prices

Posted by Tracy Alloway on Aug 05 09:03.

BIS analyst Előd Takáts is worried about ageing. And not in a personal way, either.

In a caveat-heavy but very interesting Bank for International Settlements working paper, the economist seeks to investigate how ageing populations will impact asset prices — specifically, housing.

And Takáts’ findings are pretty straightforward. While he doesn’t forecast a 47 per cent “meltdown” in asset prices — a la Mankiw and Weil in 1989 — he does expect “some significant negative effects” :

. . . demographic factors contributed positively to real house prices in many countries in recent decades. For instance, the United States is estimated to have enjoyed around 80 basis points per annum demographic tailwinds in the past forty years compared to neutral demographics. Looking ahead, forecasts of the demographic component for the next forty years, based on United Nations (2008) population projections, uniformly point towards substantial demographic headwinds. For instance, the impact in the United States is estimated to be around 80 basis points per annum. European economies and Japan are expected to face even stronger headwinds. Based on the analysis, global asset prices could face up to a full percentage point lower return per annum than under neutral demographics.

The implication, is that if house prices face demographic headwinds, so too will financial asset prices, given that they are, in his words, “determined jointly.” Even so, Takáts doesn’t think the headwind is big enough to lead to real price declines in financial assets — unlike house prices.

And returning to that subject, here are his impact estimates:


You can see that in English-speaking countries (minus the UK, interestingly) maturing baby-boomers helped push up house prices over the past 30 years. In the US alone, the author says, the baby-boom generation increased real house prices by around 40 per cent compared to more ‘neutral’ demographics.

Which means that now, as this generation retires and start selling off their homes, Takáts reckons US house prices will fall by around 30 per cent over the next 40 years. In continental Europe, where populations have been ageing for some time, demographics have already pushed prices down and it looks like they’ll keep doing so.

Some other interesting bits from the paper include the below :

. . . old age entitlement, such as pensions and health care benefits, are likely to be cut in most advanced economies . . . Consequently, the next old generation might have to run down their assets in old age more aggressively than previous old generations as their private and public entitlements would be much less generous. This would exacerbate the negative impact of ageing on asset prices.

And this parting warning shot :

Asset price headwinds could also be relevant when thinking about financial stability. Advanced economies, households, private institutions and the public, have accumulated substantial debt in the past few years. The results of the paper suggest that the assets financed by this debt could come under long run pressure. In particular, long run asset price headwinds could complicate the unwinding of leveraged financial positions. As for the future, this possibility suggests continued vigilance against the further build up of such positions.

Furthermore, the results are also relevant when thinking about government debt sustainability. Two ageing related effects on government fiscal positions are well-understood. First, ageing will increase government expenditures, especially pension and health care spending. Second, ageing will slow economic growth as labor supply growth slows and in many cases reverses. Both of these factors will exacerbate government debt sustainability challenges. This paper highlights a third negative effect. Lower asset prices imply that long run interest rates will face upward pressure in the future. These higher long term interest rates would make debt sustainability even more challenging.

Well. No one said getting old would be easy.


Edited by Peter Hun

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When demographics tip into outright population falls.. an area can quickly have catastrophic falls in housing prices. Especially the median price homes.

In economics prices are determined at the margins. So when there is a permanent oversupply of something, the price for all units approaches zero. Even if the oversupply is relatively small like a 10% more supply than demand. Other fundamental factors start to matter more then. Like a home 30 years old may require £x amount of repairs, whereas a newer home may require less. So one is willing to pay more for the newer home.

For capitalists the only way to make obscene money is to create shortages. Then even with a relatively small shortage the price approaches the maximum ability of the marginal buyer to attain financing. Other fundamental factors like the cost of materials become largely irrelevant.

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House prices to be forced down for the next 40 years ...


Yes, but not really much forecast to happen in the UK according to the graph <_< No worse than Denmark over the past few decades.

The big demographic shifts in the coming decades will be in the Club Med, East Asian, SouthEast Asian & Latin America (who appear to be following trends seen in Latin Europe) not the anglophone ones. UK has a current TFR of 1.9, the highest for decades (2.1 being replacement level), it is now higher than Brasil and soon will be greater than Mexico's

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When demographics tip into outright population falls.. an area can quickly have catastrophic falls in housing prices. Especially the median price homes.


100% true this one, seen this effect first hand in Bulgaria !

Population outflows, low birth rate, except gypsies - but they don't buy ;)

Checkout rightmove prices for 4-7 bed detached with a vineyard + 10 hec's = <10K sterling nuff said really

Edited by concerned_money

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