As the population ages, could generational differences trigger a housing deflation?
Many understand that there are numerous factors that affect the real estate market. Those who are interested may track the daily ups and downs of the stock, bond, or commodities markets; some look forward to reading the minutes of the Federal Reserve’s Open Market Committee meetings, and others may peruse the Fed’s “Beige Book.” But some economists are suggesting that many are overlooking the most obvious factor that could impact the real estate market for years – the aging population.
As the Baby Boomers make way for Generation X, the generational population size difference will be noticed in a number of ways. There is increasing discussion about the affect of the aging population on assets, specifically real estate and housing. As the population ages, some experts expect a deflationary market due to the shifting generational demographics. And a few imply that the deflationary effects of the great recession might pale in comparison to those of the generational shift.
In an October 2012 Realtor Magazine article, the Counselors of Real Estate® (an affiliate of the National Association of Realtors®) listed the “aging population” as the number one matter affecting real estate. Although an aging population impacts a number of real estate sectors (such as retail and medical); the demand for housing will certainly be affected. They define the shift geographically, where some regions gain over others.
Mary Ludgin, of Heitman LLC, describes the geographic shifts that may be associated with an aging population. In her article “Shifting Demographics: Real Estate Investment Implications,” Ludgin forecasts increasing demand for apartments and offices mostly in downtown areas. However, a population migration is expected to favor the “mountain west,” southwest, and southeast. She expects high amenity cities to do well.
A working paper published by the Bank for International Security (Aging and Asset Prices, August 2010; bis.org), presents the theory and data linking age demographics and asset prices. The paper asserts that because the Baby Boom generation is substantially larger than the preceding Swing generation (the WWII generation) and the subsequent Generation X, asset prices rose substantially during Boomers’ “active years;” and are expected to decrease during the declining years. The data suggests that Baby Boomers home buying activity pressured home prices to increase by as much as 40% during active years; and as the population ages, home prices are expected to decrease by as much as 30% in the next forty years. Yet, some economists and prognosticators are hyping such deflation to occur in the next ten years.
Although the result of an aging population on housing sounds daunting, aging demographics is not the only force active upon home prices. Although Japan is often cited as the poster child of negative influences of generational effects on home value; there are some economies, such as the UK, where home prices have transcended generational effects and made positive gains.
Even though attention focused on an aging Baby Boom generation has been about retirement and/or relocating, some have begun to talk about the generational shift’s effect on real estate and resulting home buying trends by Generation Xer’s and Yer’s, and Millennials. Besides geographical shifts, localized effects that are often experienced include the trend of transformation and/or tear down of older homes that once met the needs of previous generations, to build modern and efficient dwellings to meet the needs of those who are actively purchasing homes.
by Dan Krell
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.