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I just finished reading a respectable article on the impact of demographics (baby boom) on interest rates, consumption, and housing prices. The article, published November 2005 by Robert Martin, is available at the US Federal Reserve website.
I won't bore you with the detailed analysis - it is extensive and barely understandable for a layman (including me) - but essentially the outcome of his analysis is that US home prices are affected dramatically by demographics because of the effects on productivity, consumption, and interest rates. The conclusion of the study is that US house prices are due to fall approximately 30% in real terms over the next 50 years.
To quote (on pages 26 and 27 ):
"The model gives a gloomy view of house prices going forward. . . . In the near term, house prices will peak in level terms sometime between 2005 and 2010, the exact date of the peak turns out to be sensitive to the calibration. . . . Indeed the date of the collapse itself . . . can be moved as early as 2008. . . . Following the peak, (real) house prices decline over 30 percent in value over the next 50 years. While this number seems quite large, it must be placed in perspective. Real house prices fell almost 20 percent in the three years following the 1979 peak. Real house prices also fell around 30 percent in the United Kingdom following their 1989 peak.
Will this decline in house prices occur? There are several channels through which the results of the model could give a misleading prediction of future prices. The first and perhaps most unlikely is that the rate of productivity growth in consumption goods picks up sufficiently relative to productivity in housing output to offset the decline in labor input. Second, and more likely, is that the model assumes that agents over the age of 65 have zero productivity. This is an unrealistic assumption. Agents over the age of 65 can work and if they chose to do so in mass numbers then the timing of the downturn might be quite different. I would note that they are most likely not as productive as younger workers and almost every body agrees that at some point they will no longer be productive. Keep in mind, that while 30 percent seems fantastically large, I will show data for Japan in which the model exactly replicates the 34 percent fall in Japanese real house prices over 15 years." (look at the study for further details)
To comment on the study, it is probably the most elegant study on house prices I have ever read. It comes from a respectable source and is not likely influenced by outside interests. It is purely academic but profound in the study model's conclusions.
What do you think?