Demographic Change, House Prices, and the Real Rate

Aging populations, driven by low fertility rates and increasing longevity, are a defining trend in most advanced economies. This demographic shift has far-reaching implications for asset prices and rates of return. This research investigates the relationship between demographic change and house prices. Using a quantitative life-cycle model calibrated to German microdata, I document the following: In line with past trends (1) demographic factors have contributed significantly to the long-term rise in housing prices of which much can be attributed to indirect general equilibrium effects of falling real rates. (2) Based on projected demographic trends, the model suggests that over the remainder of the 21st century declining populations and rising old-age dependency ratios place downward pressure on real house prices while (3) the composition of wealth shifts from capital to housing wealth mitigating the drop in real rates.