Will Population Ageing Cause a House Price Meltdown in Australia?

Abstract

The life cycle hypothesis suggests that when the Baby Boomers retire, many are likely to sell their assets to finance their retirement, exerting downward pressure on house prices. This paper examines whether demographic transitions, particularly the increasing proportion of the population in the old age cohort due to the retirement of Baby Boomers, will precipitate a dramatic decline in real house prices in Australia. The study uses a structural vector autoregressive framework. This is an important improvement over the reduced-form regression strategies usually employed in the literature. Both the demographic and non-demographic variables used in the empirical analysis are treated as endogenous and reverse causality between the variables is taken into account. The population ageing dynamics are modelled using impulse response functions and, thus, an insight into the potential magnitude of demographic shocks, particularly retirement shocks, is obtained. A much longer time series from 1950 to 2014 is used in the empirical analysis. The findings reject the predictions that population ageing, or more specifically, changes in age structure particularly due to retiring Baby Boomers, will lead to pronounced downward pressure on real house price in Australia. The results suggest that macroeconomic shocks and house price specific shocks explain more of the variation in house prices than the shifts in the population age structure, suggesting that such factors could outweigh any effects of future demographic shifts on house prices. At present the principal residence is excluded in the means test calculation for the age pension. The rapidly increasing size of the retired population will impose an increasing fiscal burden due to age pension expenditure. The way in which housing is treated for age pension eligibility will affect choices on whether older households remain in current residence or face pressure on selling their houses to finance the retirement consumption. This will have an impact on releasing housing stock into the market, which is an important policy implication from this research.