Population Aging and the Effects on Real Estate and Financial Asset Returns

Abstract

This paper investigates the effects of each age group in the population on housing prices, the returns on different classes of bonds and the excess returns on equity across countries and over time. Previous empirical research focusing on a single country found a negative effect of the ratio of the old to working population on the returns to all assets. However, a more complete framework that encompasses both individuals' consumption-saving decision and portfolio allocation may advance our understanding of how population aging influences asset returns. I construct a high-order polynomial estimation of the demographic structure and then run an unbalanced panel regression with time fixed effects on the change in housing prices (37 countries), total returns of equity indices (53 countries) and total returns on bonds (53 countries). The results show that population aging has the strongest effect on housing prices. Real returns on housing and bond decline as the population gets older. On the other hand, equity premium is higher in countries with relatively older population indicating that risk aversion increases with age. As a robustness check, the joint estimation results using Seemingly Unrelated Regressions are consistent with the individual regressions.