Demographics Outlook, Credit Conditions, and Property Prices

Chihiro Shimizu, Yongheng Deng, Tomoo Inoue and Kiyohiko Nishimura

No e198, Working Papers from Tokyo Center for Economic Research

Abstract: Many developed countries have experienced prolonged economic stagnation in the aftermath of property bubbles bursting. Such observations have led people to believe that economic stagnation accompanied by property bubbles has longer and more severe consequences than other forms of economic stagnation. This study conducts an empirical analysis to challenge this hypothesis and suggest that demographics are closely related to other aspects of long-term economic stagnation. Using panel data from 17 countries from 1974 to 2018, we investigate the residential property price dynamics by incorporating demographic factors and considering the interaction of those demographics with credit conditions. Our results shed new light on the importance of demographic factors in modeling the long-run equilibrium of residential property prices. We find that the effect of nominal interest rates determined by monetary policy on asset prices varies depending on the country and the degree of population aging at the time. We also find that persistently optimistic population projections lead to the over-supply of residential stocks in rapidly aging countries, resulting in stagnant residential property markets. We demonstrated that ignoring the demographic and credit factors in the dynamics may lead to misjudgment of the long-run equilibrium conditions and incorrect policy decisions.

Pages: 36 pages
Date: 2024-01
New Economics Papers: this item is included in nep-age, nep-fdg and nep-ure
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