Baby Booms and Asset Booms: Demographic Change and the Housing Market

Abstract

How do demographic changes affect asset prices? Based on centuries of data, this paper shows that demographic changes are a key and predictable determinant of house prices. A one percentage point increase in the current birth rate increases house prices about 25-30 years later by 4 to 5%. Using individual data on housing decisions, transactions and portfolios we argue this is driven by strongly age-dependent demand for home-ownership and the limited response of investors to such shocks. Correspondingly, we find large impacts of past birth rates on rent-price ratios, but negligible impacts on rent prices, bond yields, and dividend yields.

Keywords: house prices, portfolio choice, demographic structure, return predictability

JEL Classification: G11, G12, R31, N33, J10