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What is the ‘new normal’ for housing?

What is the ‘new normal’ for housing?

A few months ago we commented here on an article in the AFR speculating that Gen Y may soon be buying a house cheap from boomers who have no-one else to sell to and why renting makes more sense than buying. Since Roger bought the bigger family home in 2006,he has argued that house prices would cease rising to new highs – especially the six and seven bedroom variety.

Whilst the mere mention of Australian housing and prices can stir up passionate and spirited argument for and against house price rises, just this morning I stumbled across the below series of charts produced by Citigroup’s Matt King.

Similar to the M/O ratio which plots P/E ratios against the ratio of the middle-age cohort, age 40–49, to the old-age cohort, age 60–69 from 1954 to 2010, Matt looks at the relationship between the inverse dependency ratio (the proportion of population of working age relative to old and young) and maps that against real house prices over time. This produces a longer-term measure of prices home owners are willing to (or have to) pay for housing.

The charts are a powerful representation of a force driving all economies and prices: demographics. Whilst prices have somewhat lagged the dependency ratio on the way up, give or take a number of years and almost every country here shows that the peak in real estate prices is highly correlated with the peak in dependency ratio.

Its worth contemplating whether the recent past, characterised by rising gearing levels and falling price to income ratios (affordability) is the new normal, or whether, as we transition into an environment where there are more pensioners than workers and therefore fewer people to ‘downsize’ too,what may transpire in the future in Australia is anything like the experience in the US, Japan, Ireland, Spain and the UK.

As always, delighted to hear your thoughts.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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  1. How does BIG Australia factor in to these numbers? Would like to see the charts based on population of say 45m by 2050. Most of the increase would be in the 20 – 40 age group and would have a large impact, or am I mistaken?

  2. Indeed a direct correlation between global oil prices could be shown and argued to cause the house price effect you ascribe. The price for anything is related to a) the supply, b) the cost of finance and risk attitudes of the available investor pool and c) population and the availability of money. I believe it is the combination of these factors that drive long term asset prices such as housing. Global population is rising and ascribing too much to the baby boomers does not consider the impacts of total aggregate demand from potential offshore investment (if the dollar fell to 75c how many houses would non-Australians purchase?). Every economy above has different causal factors driving their house values but the pool of causal factors is the same.

    • If the dollar fell to 75c, I don’t think this would really affect off-shore investment. While house prices would be cheaper for foreign investors, this would be counter-balanced by the fact that the cash flow from these investments would also be worth less in foreign currencies. Also, foreign investors seem to concentrate on very specific parts of the residential market in Melbourne and Sydney, so foreign investment is not a uniform influence across the market. It would, however, be interesting to see how things turn out – on the one hand ludicrously low interest rates (forecast to go even lower next year) are encouraging people to invest in housing once more. On the other hand, we already have one of the most expensive markets in the world, an enormous cohort of baby boomers about to retire and downsize, and a whole bunch of negative-gearers who will rush out of the market once they realize that capital gains have stagnated. Interesting times…

  3. Excellent research. Matt is not the only person I have heard about warning that the global economy will contract in line with the baby boomers changing from spending and investing to cashing in and saving. This cohort benefited from low interest rates to build wealth but there now may be a push towards a return to higher interest rates to maximise returns on more conservative investments. Baby boomers still hold much political power. Also remember some European countries have youth unemployment rates of close to 50% – how are they going to grow the global economy?

  4. How likely is mere co-incidence mistaken as causation?

    Baby-booming related to WWII, which was a fix global event. Likewise, with the exception of Japan, the collapse of property prices related to GFC, which again was a fix global event. Isn’t this an equally compelling explanation of the similarity of the graphs across these countries?

    • Matthew Rackham

      I wish there were r-values for these graphs

      I’m not saying the premise of the article is wrong but without some stats these graphs are uninterpretable

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