Demographic Drag on Housing

by: Babak

The developed world is getting older and that has major implications for asset pricing. Recently we looked at the correlation between demographics and PE (price/earnings) ratios: Predicting P/E Ratios With Demographics.

A working paper from the Bank for International Settlements looks at the effect of the aging population of several major countries on the respective real estate market.

The research starts by looking at 22 advanced economies’ real estate markets from 1970 to 2009. Using the data, the author then forecasts the future effect of aging by extrapolating forward from 2010 to 2050:

demographic impact housing Europe Sep 2010

The conclusions are sobering. As a caveat, it is important to remember that demographics are but one variable among many that effects real estate and in the future, those other variables may compensate any headwinds from an aging population:

The results suggest that ageing will lower real house prices compared to neutral demographics over the next forty years in all countries in the sample. The estimated ageing impact is relatively mild in the United States with around 80 basis points per annum headwinds. The drag is estimated to be much larger in most of continental Europe and in Japan. This finding is at the high end of earlier empirical estimates, but does not constitute an asset price meltdown.

You can find the complete working paper here: Ageing and Asset Prices.