Real Estate Prices And Demographics: Implication For China2 March, 2011, 23:27. Posted by Zarathustra
Tags: Ageing, Bubble, Demographics, Real Estate
Yesterday I wrote about how demographics can possibly help China in rebalancing its economy despite the likely effect of slower economic growth. Unfortunately, ageing is likely to cause another problem for China. This one will be in the real estate sector.
I have previously written my critique of the overly-optimistic Super-Cycle Report, in which I have put the chart below showing the Shiller P/E Ratio (i.e. cyclically-adjusted price-to-earning ratio) for the S&P 500 with the percentage of “Net Investors” cohort within the entire population. The “Net Investors” cohort was defined as the people between 35 to 54 years old. According to the standard life-cycle hypothesis, these are the group of people who are saving the most to prepare themselves for retirement, thus the larger the proportion of these group of the people relative to the entire population, the hypothesis predicts that asset prices should be higher. In other words, asset market may be more prone to bubbles if the size of this group of people is large. As far as US stocks are concerned, the hypothesis seemed to have held pretty well.
Source: Robert Shiller
Előd Takát of the Bank of International Settlement (BIS) wrote a paper back in August 2010 titled “Ageing and asset price” (H/T to Leith van Onselen). The study examined the possible impact of ageing to real estate prices. Between 1970-2009 as the baby boomers grew up, they drove real estate prices up in all but one English Speaking country (that one was the United Kingdom of Great Britain and Northern Ireland). In the United States, for instance, he estimated that the demographic “tailwind” for the real estate prices in the past 40 years was roughly 80 basis points per year relative to neutral demographics. However, as ageing continues, most countries will face demographic “headwinds”. In the case of the United States, he estimated that the headwinds will be roughly 80 basis points a year relative to neutral demographics. In other words, real estate prices in most countries with ageing populations will be declining in the long-run.
What is the implication for China? China will be ageing rapidly. While the one-child policy helped China to have a rapid increase of working-age population relative to total population in the past 30 years or so, the demographic dividend would have ended in 2010. Both working-age population as a percentage of total population and the so-called “Net Investors” cohort relative to total population peaked in 2010, and are both declining rapidly.
Source: UN Population Division
Although far from predicting a burst of real estate bubble, this implies that China Real Estate will likely to face some demographic headwinds.