Many people believe that equity and house prices will be dragged down by baby boomers as they reduce purchases and sell holdings during their retirement years. But this forecast is based on just one of the many factors that impact equity and house prices, so its predictive power could disappoint. Indeed, the track record of previous demographic-based predictions suggests such an outcome is likely.
A great deal of scholarly research has established the significance of the other factors. Housing demand is also influenced by immigration, income growth, inflation, regulatory changes, government policies and other variables, as highlighted in papers such as “Demographic Changes and Real Housing Prices in Canada” by Mario Fortin and Andre Leclerc. The impact of baby boomers can be further offset by supply changes: whenever housing demand softens, for example, homebuilders usually pull back on the construction of houses and this reduction in supply helps stem price declines.
The perils of relying on demographics to predict house prices were illustrated early on. In 1989, the much-discussed paper, “The Baby Boom, The Baby Bust and The Housing Market” by N.G. Mankiw and D.N. Weil, analyzed demographic factors and predicted U.S. real house prices would fall by 3 per cent annually between 1987 and 2007. Instead, they rose by about 4 per cent a year.
Demographics expert David K. Foot didn’t have much success either. In his 1996 book, Boom, Bust and Echo – How to Profit From the Coming Demographic Shift, the real-estate decline of the early 1990s was projected to continue over the long term because most boomers had already acquired their houses and the “baby bust” generation following them did not have the numbers to pick up the slack.
Demographic-based projections haven’t worked well for stock markets, as highlighted by the work of Harry Dent. Most of the calls made in his books have been considerably off the mark. For example, The Next Great Bubble Boom (2006) predicted the Dow Jones Average would hit 40,000 by the end of the 2000s. A mutual fund Mr. Dent formed in 1999 folded six years later after losing most of its assets; an exchange-traded fund he launched in 2009 is dramatically trailing the S&P 500.
Demographic analyses and forecasts may have their uses but they would seem to lie more in areas where the other causal factors are less numerous. If the stock and housing markets do go bust, it would require the co-operation of the non-demographic variables. If we include them in the analysis, a less gloomy scenario may emerge.