And the average weekly per capita household savings by age cohort, which has been calculated by subtracting expenditure from incomes:
Some interesting observations can be deduced from these charts. Firstly, savings are typically highest between the age of 25 to 34. This is the key household formation age whereby couples save to purchase their first home.
Between the ages of 35 to 44, household finances are typically tight as households pay-down their mortgages and costs relating to raising children are at their highest level (think school fees).
Between the ages of 45 to 54 and 55 to 64, children leave home and adult earnings hit their peak. Households are also increasingly focused on accumulating assets for their retirement.
From the age of 65 onwards, both incomes and expenditures shrink as individuals enter retirement. Assets accumulated over one’s working life are also divested.
The above break-down of the ABS’ income and expenditure surveys have important implications for asset prices, including housing. The 25-34 year age group is the key cohort to watch for owner-occupied housing, whereas the the 45 to 54 and the 55 to 64 age groups are the key cohorts that purchase investment properties and holiday homes (remember the Baby Boomers own half of Australia’s second homes). By contrast, the over 65’s are more likely to sell their investment properties and/or downsize in order to free-up funds for their retirement.
Now look at the projected trajectory of Australia’s population using the ABS’ medium growth forecasts:
As you can see, the key home buying age groups are predicted to shrink in relative size just as the over 65 home sellers balloon in size. Note also the big rise in the 45 to 54 and 55 to 64 year age groups (partly offset by a fall in the 25 to 34 year olds) between 1990 and now – commensurate with the huge surge of negatively geared housing investment and the sharp rise in house prices experienced over the past decade or so.
What should be clear from the above analysis is that the age structure of the Australian population suggests that the demographic demand for housing is likely to slow significantly (albeit gradually) over the coming decades.
It should be noted, however, that these findings alone do not necessarily imply falling real asset prices, since prices are also influenced by other factors, such as income growth, which could compensate for the impacts of ageing. Rather, the purpose of this analysis is simply to highlight that Australian asset price growth will be more difficult to achieve over the next several decades, due to the demographic headwinds of ageing, than was achieved over previous decades.
The above analysis supports a 2010 Bank for International Settlements (BIS) working paper, which examined the impact of changing demographics on asset prices (particularly housing) in 22 advanced nations over the next 40 years. The results suggested that ageing will lower real house prices compared to neutral demographics (i.e. where the age profile of the population remains constant) over the next 40 years in all 22 countries in the sample.
The below BIS chart, which shows the demographic impact on house prices over the past 40 years (1970 to 2009) and the next 40 years (2010 to 2050), is particularly relevant for Australia’s housing market.
According to the BIS, as the Baby Boomers reached working age and started buying housing from 1970, they helped to push-up property prices throughout the world. In Australia, over the past 40 years the Boomers increased real house prices by around 30% compared with what would have occurred had our age structure remained neutral. However, the ageing of the Baby Boomers is projected to reduce Australia’s real house price growth by around 30% over the next 40 years compared to neutral demographics. This is because the Baby Boomers will reduce their housing stock as they enter retirement by liquidating their investment property holdings and downsizing, thereby depressing house prices.
Although Harry Dent’s prediction that the Australian housing market will crash is somewhat hysterical, his analysis of the impacts of population ageing on the economy and asset prices is ground-breaking and deserves your attention.