Will an Ageing Population Impact Housing and Equity Prices in Australia from 2016 to 2050?

Abstract

This thesis examines the impact an ageing Australian population will have upon real residential property and equity prices from 2016 to 2050. A study of the relationship between population age and key asset prices is germane, given Australia is experiencing a long term ageing cycle. The median age of the Australian population has been rising since 1970 and is forecast to keep increasing at a similar trajectory until at least 2050. Relatively low birth rates and the ageing of the post-WWII baby boom are driving this phenomenon. The Life Cycle Hypothesis (LCH) has traditionally been employed as the theoretical framework to understand the relationship between population age and asset prices. A combination of social changes, tax incentives and extended life expectancy, however, makes it difficult to apply the LCH to the Australian experience. As a result, this paper hypothesises a positive causal relationship exists between population ageing and asset prices, in particular housing. The thesis question is answered by analysing historical data through the construction of time series regression models for each asset class. The results from the historical study are applied to four population projections between 2016 and 2050 determined by changes in birth rates, net immigration and life expectancy. Future population projections are sourced from the Australian Bureau of Statistics. The results from the historical analysis support the hypothesis that an ageing population has been a positive for real house prices. As Australian’s have aged, they have progressively invested in housing, supporting strong real price growth. The extent of the positive impact however, is debatable given that non-demographic factors were also found to be highly influential. When the results from the historical housing analysis were applied to the projected population scenarios it showed real housing prices should continue to benefit from the ageing process. The historical equity regression model concluded the relationship between real equity returns and changes in population age have been positive but extremely weak. The analysis revealed that factors other than age have been the key drivers of real equity prices. As a result, it was found that the ageing process from 2016 to 2050 would have a minor positive impact on real equity prices. The thesis also undertakes an historical case study of the ageing process in Japan. Japan has one of the oldest populations in the developed world and is expected to age rapidly in coming decades. The Japanese case study disclosed a strong cohort effect produced by the post-WWII baby boom. Japan’s baby boom was short and intense, resulting in a major shock to residential property and equity prices. The Japanese experience can largely be explained by the LCH, further emphasising the special circumstances that exist in Australia.