Boomers have pushed Canadian house prices up 20% since 1970, real house prices could now drop 40%

The Bank of International Settlements wrote a report last summer titled Ageing and Asset Prices
According to their research, boomers have pushed up Canadian house prices up 20% but because of boomers, house prices could drop 40% compared to neutral demographics by 2050. 

The paper investigates how ageing will affect asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing.

Ageing is global. Advanced economies are ageing fast and emerging economies are closely following them. 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 ageing is much faster elsewhere. Perhaps Germany and Japan are the best known examples, but ageing is not limited to advanced economies. China will be older, in terms of median age, than the United States by 2025. These ageing economies account for the overwhelming majority of global investable assets. And economic theory suggests that ageing can drive asset prices down. The question naturally arises: What will happen to asset prices? Will ageing lead to a global asset price meltdown?

These estimates are not real house price forecasts, but only estimates of the demographic impact on real house prices. As a number of other factors affect these prices, their movements can be very different from those implied by demographics. For instance, both Italy and Korea experienced strong real house price growth in spite of significant estimated demographic headwinds in the past forty years.
The results suggest that global asset prices are likely to face substantial demographic headwinds in the next forty years. The theory is straightforward: House prices are determined jointly with financial asset prices. Hence, if house prices face headwinds, so should financial asset prices. Using the estimated coefficients and global population forecasts, asset prices would face headwinds up to a full percentage point. This headwind is substantial, but based on historical returns would not imply real asset price declines.

 

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 forty 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 estimates, the baby boom generation increased real house prices by around 40 percent in the United States compared to neutral demographics in the past forty years.

 

However, 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. The estimates suggest that demographic factors would reduce US housing prices by around 30 percent compared to neutral demographics in the next forty years.

The estimates suggest that demographic factors would reduce Canadian house prices by around 40 % compared to neutral demographics up until 2050.

Conclusion

there are two ongoing economic trends which are likely to affect the estimated impact of ageing on asset prices in the opposite direction. First, advances in technology and health are likely extend working age and redefine old age in the future.This would mitigate the negative impact of ageing on asset prices.
Second, old age entitlement, such as pensions and health care benefits, are likely to be cut in most advanced economies.This would exacerbate the negative impact of ageing on asset prices.

There is no denying that Canadian demographics will negatively affect house prices, what is debatable is how much and when.