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:

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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