Karen Maley
Published 4:55 PM, 18 Aug 2010
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 Elod 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.”
Not Just in Japan
Mary Ann Sieghart: House prices are finally falling. Good
What the housing boom has done is redistribute wealth to the middle-aged and old from the young. People of my age are waking up from this baby-boomer selfishness
Take a look at the Savills forecast for house prices, and you'll see thunderclouds with rain for this year and next, followed by sunny intervals in 2012 and then bright blue skies. It's a neat visual shorthand, and it's easy to see why an estate agent would want house prices to rise. But, for many of the rest of us, shouldn't it be the other way round?
I – like much of my generation – have spent most of my life cheering rising house prices. Each time a newspaper reported another breathtaking leap in the value of my home, I would calculate how much money I had "made" simply by contemplating the sitting-room wall. In many years, it was more than my salary. But unless I planned to sell up and live in a tent for the rest of my life, it wasn't real profit.
When I first got on the housing ladder, way back in 1982, I bought, with my brother, a four-bedroomed house on the then rather grotty Islington/Stoke Newington border. We filled it with friends, and their rent helped to pay our mortgages. Nearly 10 years later, when we sold it, it was worth three to four times what we paid for it, but that was still only enough to buy a similar four-bedroomed house on the Islington/Stoke Newington border. In other words, I was relatively no better off.
But first-time buyers were much worse off. Instead of the £72,000 that my brother and I had to raise and borrow to buy a house, they had to find £250,000. Today, there's a house for sale in the same street for a staggering £1.65m.
Admittedly the area has gone up in the world. Then it was packed with cheap hardware stores which built teetering multi-coloured displays of plastic dustbins, mops and buckets on the pavements outside. Now it's probably full of stone-baked pizzerias and shops selling scented candles. But that's still a ridiculous sum for a pretty ordinary house.
Twenty years on, people of my age have teenaged children who will soon have to make their own way in the world. So we're starting to wake up from the baby-boomer selfishness that David Willetts identified in his book The Pinch: How the Baby Boomers Stole Their Children's Future – and Why They Should Give it Back. We are recognising the need to cheer falling house prices, not rising ones. Which is why last week's survey from the Royal Institute for Chartered Surveyors showing the market weakening is surely good news.
Who is seriously hurt by falling house prices? People who bought at the peak of the boom and are now in negative equity. But unless they are forced to sell, it is only a theoretical problem. In the early 1990s, when interest rates peaked at 15 per cent, the problem was real. Many could no longer afford their mortgage payments and had their homes repossessed. If they were in negative equity as well, they still owed the bank money even after their homes had been seized. These days, with incredibly low interest rates, most people can still afford to pay their mortgages, so they can wait till the market eventually sweeps them off the rocks.
Then there are homeowners who have reached retirement age and are planning to trade down to something smaller. They will be left with less cash in a falling market, but their generation has benefited massively from rising house prices. They can hardly complain.
For what the housing boom has done is redistribute wealth to the middle-aged and old from the young. Newspapers celebrate rising house prices and deplore falls because they are edited – and often read – by middle-aged people who like the idea of the value of their home going up. They don't reflect the desperation of people in their twenties and thirties who wonder how they are ever going to be able to afford a place of their own.
Politicians, meanwhile, know that the middle-aged and elderly are more likely to vote. The burden of rising house prices falls on the young and the not-yet-born – in other words, those who either don't or can't yet vote. So governments have usually preferred to make homeowners feel richer and happier.
Look what's happened as a result. Thanks partly to the deregulation of the mortgage market, household debt in Britain rose from 105 per cent of disposable income in 2000 to 160 per cent in 2008. People borrowed money against the value of their houses to spend on holidays, cars and designer kitchens. That led to an unsustainable economic boom and a catastrophic collapse in savings.
We couldn't go on like that. The retrenchment since the credit crunch has been painful but necessary. Now people are at last paying off debt and starting to repair their savings. With any luck, if house prices fall further, they may stop seeing investment in housing as a tax-free, one-way-bet pension fund and more as a way of putting a roof over their heads. They could listen to Adam Smith, who wrote in The Wealth of Nations in 1776: "A dwelling-house, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue."
But there is still a long way to go until that happens. Despite the price falls of the couple of years after the credit crunch, property is still overvalued. For the first-time buyer, the house-price-to-earnings ratio is now 4.6: down from the 5.4 peak it hit in 2007, but still more than twice the 2.2 we saw in 1995 and 1996.
Meanwhile, lenders are demanding more from first-time buyers. They are asking for deposits of up to 25 per cent of the value of the house. No wonder the average age of a first-time buyer who has had no financial help is now 37. And no wonder a survey by Shelter has found that 38 per cent of parents believe their children will never be able to afford a decent home.
Those of us who have had decades of gain from the housing boom ought to redress some of the generational unfairness by helping our children with a hefty deposit. But what about those who can't raid the Bank of Mum and Dad?
One thing we can do to help them is to be less selfish about the building of new homes. One minister I spoke to yesterday said that his local residents' association meetings are all made up of over-50s complaining about new development. His constituency surgeries, meanwhile, are full of under-30s who can't afford to buy or even rent.
The Government's proposal to allow local communities to decide if they want new, affordable housing will only work if the older owner-occupiers don't exercise a selfish right of veto. Meanwhile, maybe David Cameron is right to suggest that older people rattling around in large council houses should trade down to allow young families to move in.
Apart from encouraging more houses to be built, there is not much the Government can do to help prices fall further. But there are encouraging trends for the younger generation. Unemployment is likely to rise as public-spending cuts kick in. Banks are no longer prepared to lend mad multiples of salary. More homes are now coming on to the market. All these should have a dampening effect.
In other words, sunny skies ahead! I can't imagine the Daily Express, Mail or Telegraph ever clearing their front pages to celebrate the good news that house prices have fallen. But with the average age of the first-time buyer increasing, it may not be too long before this newspaper does.