cheaprealty net

"When the size of the working age population is temporarily high as it is now, output is temporarily high and households wish to transfer assets to the future. Because ability to do so is limited , there is upward pressure on real asset prices - house prices rise, interest rates fall. The increase in house prices occurs now despite the certain knowledge that once the baby boomers retire real house prices will fall."

This hypothesis was reported by a member of the US Federal Reserve, Robert Martin, in a paper titled, The Baby Boom: Predictability in House Prices and Interest Rates, in November 2005, right around the time house prices reached their peak in the US.

What does this mean? For demographic reasons replicated in several models, steep drops in US housing prices are possible. Coincidentally or not, housing prices seem to have peaked right around the point the US working age population has peaked, as shown in the graph reproduced above, which was drawn from the data in that report.

So why has the US Federal Reserve seemingly pursued policies that allowed this scenario to unfold, if they realized such an outcome was a demographic possibility?

It may have been a foregone conclusion that an asset bubble would occur anyway. As Martin noted:

"...the demographic impulse implied by the baby boom is a likely driver of both interest rates and house prices and that both of these prices are likely to be influenced for some time to come as the baby boomers slowly retire and eventually die off."

The US and other western countries face problems with the retirement of large numbers of Baby Boomers, as they liquidate their portfolios in retirement, or when their portfolios are liquidated to pass to their heirs: unless there are plenty of younger buyers available, prices will have to fall, if there are less affluent, or less workers available to buy the assets of the Baby Boomer generation. This argument has famously been made by american economics professor Jeremy Siegel, who notes in a discussion reported by Business Week in April 2006:

"The big questions facing the developed world are, who's going produce the goods, and who's going buy the assets. If there are not enough workers earning income, then there aren't enough buyers of all the stocks and bonds that are going be sold. It's the flip side of same question."

North America is not the only place grappling with this problem - it is also an issue in Asia, notably in Japan, where a columnist in Japan Today made the following comparison this month between the retirement of the baby boom cohort and the effects of a military attack:

....in fact, the period of greatest loss (but not necessarily loss of life) of males from the Japanese workforce is in fact just about to occur, when the postwar baby boomers, the so-called "Dankai" generation, start turning 60. Between now and three years hence, 6.8 million mostly males will be leaving the workforce, and some 2.2 million of them will do it this year. This is a stupendous number — more than three times the number of those fallen in WWII and representing about 10% of the nation's labor pool.

Will these demographics puncture the sunny "real estate only goes up" world view that now holds sway, and helped inflate the present bubble? One could take that long range view, if one agrees there is a likely correlation between these demographics and future real estate trends.

And what about locally, is it possible for Victoria to escape such demographic forces? If prices go down elsewhere, will Victoria remain unscathed, on the basis that so many retirees will be moving here every year anyway?

We should know by 2024. Stay tuned!