Ageing And Asset Prices

The reasons why I am pessimistic about both China and Hong Kong real estate are more than just bubble.  I am bearish not only in short-term, but in long-term.

The key reason to be bearish in a long-term horizon is that population ageing all over the world will have some pretty negative impact on asset prices.  Jim Reid and Nick Burns of Deutsche Bank, for instance, reasoned that because of ageing population, returns will be sub-average in many asset classes, shorter business cycles, higher volatility, and (interestingly) more QE.

Specifically to real estate, Előd Takáts at the BIS suggested that ageing population will present a demographic “headwind” to the real estate market.  The demographic changes in the next 40 years, for instance, will lower US housing price by 30% relative to a neutral demographics.  That corresponds to roughly 80 basis points per annum of demographic headwind.  Other countries in the continental Europe as well as Japan will be in even worse shape:

chart
chart

Leith van Onselen has been somewhat bearish on Australian real estate based on this, and I am somewhat bearish in the long-run based on same reason.  True, both China and Hong Kong are, of course, missing from Előd Takáts’ analysis, but I have stressed that both China and Hong Kong are now facing the similar kind of demographic challenges which Japan and the United States were facing in early 1990s and early 2000s respectively.  My guess, after all, is that China and Hong Kong real estate will face a demographic headwind.

I know my idea is bound to be controversial, especially when most of the people are so optimistic about the China growth story, believing that China will continue to grow at a rapid rate for another decade or so.  I am a few of the people who do not believe in this story.

This article originally appeared here: Ageing And Asset Prices
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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