There’s a theory out there that says because of the upcoming demographic reversal, the housing crisis will eventually correct itself. That is, as Baby Boomers retire and die off, Australia’s population will stabilise or even decline, leading to a softening of house prices and improved affordability. Economists in the US first floated the theory in the late 1980s, and it seems to resurface every few years when someone wants to generate headlines.
The theory appeals to many because it makes sense in simple supply and demand terms. Indeed, a new paper found that the combination of the still-active Boomer generation along with their children (millennials) reaching peak home-ownership ages predicted today’s relatively high house prices. According to the authors, as the Boomers retire and start to die off, “a rapidly aging population, reduced investment demand for housing will likely result in lower house price growth”.
However, there are caveats. And the paper touches on a big one:
“At the same time, many areas are still experiencing an influx of young people, due to both migration and large past birth cohorts. When these cohorts turn to homeownership, that will likely push up house prices.”
We have evidence from countries further along in terms of demographic decline showing that house prices in desirable areas can become even less affordable as society ages. That’s because while aggregate prices might stagnate as regional towns and cities die (“free” villa in Italy, anyone?), affordability in major cities will remain prohibitive as people abandon declining regions and concentrate in cities.
For example, here’s an extract from a paper published last year looking at Japan:
“Fig. 9 illustrates the cycle of establishing a relationship between population decline and Unipolar Concentration in Tokyo. As local populations decline, profits and markets in these areas shrink, even with similar investment levels, which diminishes the motivation for further capital investment. This reduction in new investment leads to fewer local job opportunities, compelling people to migrate to larger cities in search of employment and better living conditions. This migration further fuels the cycle: major cities, with their larger markets and higher returns, attract more capital, enabling them to provide an abundance of job opportunities. This increased influx of job-seekers into big metropolitan areas in turn expands their population, market size, and profitability, perpetuating the cycle of concentration and growth.”
Or here’s an IMF report from 2020, also on Japan:
“The greater concern ahead is a vicious cycle leading to greater regional disparities, as lower housing prices in rural areas trigger more population outflows on the one hand, and an extreme population concentration in selected few cities raises prices, on the other hand.”
And here’s a recent media article noting that nearly 60% of the inflow of people into Tokyo are those aged in their teens to late 20s—i.e., people who will soon be looking to transition from renters to homeowners:
“Tokyo saw a total of 461,454 people moving in, while 382,169 moved out. During the COVID-19 pandemic, the net population inflow to the capital slowed, reaching a record low of 5,433 in 2021.
But it is once again on the rise, nearing the 82,982 posted in 2019, just before the spread of COVID-19. Last year, young people aged 15 to 29 accounted for 57% of the total number of people who moved in.
Besides Tokyo, six other prefectures posted a net population inflow, namely Kanagawa, Saitama, Osaka, Chiba, Fukuoka and Yamanashi, while the remaining 40 prefectures experienced net population outflow. Hiroshima had the most at 10,711.”
Basically, we can’t expect the housing crisis to self-correct because most people simply aren’t willing to relocate to declining regional towns with scarce job prospects and diminishing services where houses are cheap. So rather than resolving the crisis, the exodus of the Boomer generation may even lead to further population concentration in our major cities. Given that the same barriers preventing urban housing supply from expanding to accommodate current demand in our cities still exist, such a demographic reversal may even worsen housing affordability.