Demographics are poor predictors of house prices

Incomes, inflation also important factors.

(Photo: Mitchell Funk/Getty Images)

We seem to be hearing more these days about the old bugaboo of demographics sinking the housing market, the latest manifestation being a report by Partners Capital Management. According to  Canada’s housing market: a victim of demographics, the thesis seems to be: as Baby Boomers reach retirement and stop buying houses, there are not enough younger persons to pick up the slack.

The obvious problem with attributing any great significance to this view is that Baby Boomer behaviour is but one of many factors that can impact house prices, according to voluminous research published by academics over the past 30 years. For a survey of some early studies, check out Demographic Changes and Real Housing Prices in Canada by Mario Fortin and Andre Leclerc.

Other determinants of house prices include immigration, real income, inflation, and changes to regulations (e.g. recent restrictions in mortgages to 25-year amortization periods). And don’t forget the supply side: given housing supply is elastic and responds to price signals, the impact of Baby Boomers’ actions should also be absorbed via changes in the quantity of housing supplied.

The perils of relying on demographics to predict house prices were illustrated early on. In 1989, a much ballyhooed paper, The Baby Boom, The Baby Bust, and The Housing Market, analyzed demographic factors and predicted real house prices would fall by 3% annually between 1987 and 2007. Instead, they rose by about 4% a year during the period.