By Leith van Onselen
Earlier in the week, the Daily Mail published an interesting article on the impacts of retiring baby boomers on the UK housing market.
According to the article, baby boomers transitioning into retirement are increasingly seeking to downsize in order to free-up cash to fund their lifestyles, which is in turn crimping house price growth:
Trading down from a large family house is now the single biggest reason given for selling by? homeowners approaching estate agents, says property market expert Rightmove.
Some 40 per cent of sellers say they are looking to trade down, compared with 25 per cent who hope to trade up to a larger more expensive property?
Rightmove said those trading down are generally from the baby boom generation, who have seen a sharp rise in the value of their homes in previous years, but are short of easily available cash.
The high cost of living, coupled with rock-bottom interest rates on savings and poor returns on personal pension investments, has left many retired people struggling to pay the bills?
These people are rich on paper ? in terms of property wealth ? but they are short of the cash they need to fund their lifestyles and family commitments.
Rightmove said the trend in downsizing is putting a cap on house price rises..
The expected impact of the baby boomers? retirement on home prices is a topic that I have tackled previously (for example, here, here and here).
In a nutshell, my hypothesis is that Australia?s baby boomer generation ? which comprises roughly one-quarter of the Australian population but owns nearly half of the nation?s housing assets ? will gradually become net sellers of Australian housing as they enter retirement, thereby acting to push down home prices in the process.
The baby boomers were key players in the rapid house price appreciation experienced in Australia in the decade to 2008. As the baby boomers reached peak earnings age in the 1990s, they began buying up investment properties en masse as a way of both minimising their tax (via negative gearing) and ?saving? for retirement. They were also likely to have significantly increased demand (and prices) for owner?occupier homes, since many in this demographic would have traded-up to their most expensive (?peak?) home over this period.
However, with the baby boomers gradually entering retirement, it follows that their appetite for investment properties will shrink, at the same time as they are downsizing into smaller homes. As such, one of the key demand-drivers of house price growth over the past 15 years will disappear.
Further, because higher investment yields can currently be earned by placing their funds in a bank term deposit than can be earned via rent, it is also likely that many baby boomers will sell their property investments to fund their retirements. And this process of property divestment is more likely to accelerate once the baby boomers realise that there is little prospect of continued high capital appreciation.
As mentioned previously, my hypothesis is supported by a 2010 Working Paper published by the Bank for International Settlements (BIS), which examined how demographics are likely to affect asset prices, in particular housing, in 22 advanced nations over the next 40 years. The results suggested that ageing will lower real house prices compared to neutral demographics (i.e. where the age profile of the population remains constant) over the next 40 years in all 22 countries in the sample (see below chart).
According to the BIS, as the baby boomers reached working age and started buying housing from 1970, they helped to push-up property prices throughout the world. In Australia, over the past 40 years the boomers increased real house prices by around 30% compared with what would have occurred had our age structure remained neutral. However, the ageing of the baby boomers is projected to reduce Australia?s real house price growth by around 30% over the next 40 years compared to neutral demographics. This is because the baby boomers will reduce their housing stock as they enter retirement by liquidating their investment property holdings and downsizing, thereby depressing house prices.
The tailwind that was the baby boomers? insatiable demand for housing ? both owner-occupier and investment ? has dissipated and threatens to become a stiff headwind that places significant downward pressure on Australian home values for the foreseeable future.
unconventionaleconomist@hotmail.com
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