Reader’s Question #17 – Generational Housing Bubble

The majority of reader’s questions I get tend to be situational like: can I retire, do we have enough for me to stay home from work?  So it was a bit of surprise to get a question that was looking purely for my  speculation on a topic:

I would love to read an article about your opinion of a future “generational housing bubble” regarding our aging baby boomers and our current population growth not turning over enough people to replace them.  What happens to house prices when baby boomers start selling their homes and moving into senior friendly housing?

The past 30-40 years of baby boomer house buying has fueled demand and driven up house prices creating an affordability barrier for the next generation, which in turn caused the lax mortgage rules.  They made mortgages cheaper instead of homes, and that only gave prices nowhere to go but up. Now a 3 bedroom home is just barely affordable for the average income family. If the gov’t is going to deflate this bubble  instead of waiting for it to burst then they will have to tightly reign in the growth in house prices that people have come to expect.

Well this question came in right after my post on the new measures to deflate the housing bubble.  So obviously the government has tried to take a bit out of this housing bubble, but not too much.  Why? I’m strongly speculating here it has to do with not pissing off the baby boomers by causing their housing values to crash right after the 2008 stock market correction.  After all the majority of them do vote (compared to other age categories) so the new rules I suspect are walking a fine line of doing something to cool housing, but not too much.  The decision was more of  a political one than a practical one.

So what will happen to the housing market in the long run?  I still think we are doomed to a large house value correction on average (how it plays out in regional markets is impossible for me to guess at).  Why?  It’s the basic balance of supply and demand.  There are too many boomers with non-starter houses and second houses (cabin or investment property) and too few buyers that can afford to pay what they want for those properties.  As they age and want to get rid of those homes (or more likely need to get rid of since they don’t typically have enough saved for retirement) it will put too many houses on the market all at once.  For a while the boomers might try to stick to their guns and ignore the reality but in the end some might start getting a bit desperate to sell and that would trigger a spiral down in prices.

Yet there is a large hole in my speculation.  It assumes that the majority of  boomers just stop working, since there has been a lot of talk about doing some work in retirement you may end up with a more balanced exit of the boomers from the market.  In this case it might avoid a crash in housing prices and we might just end up with a more gentle correction that goes slightly down followed by a leveling off in prices as incomes need to rise up to a more equal footing to house prices.

So that’s my speculation on the market.  Right now I would guess at about 50-50 odds for either case occurring.  The boomers are not typical in a lot of ways so trying to predict their overall movement in a market is gamble at best.  What’s your thoughts on this generational bubble?  Will it correct or not?

11 thoughts on “Reader’s Question #17 – Generational Housing Bubble”

  1. I’d hazard that immigration will more than make up for this concern. Canadians in general do not have exposure to over population which is a huge global challenge on numerous fronts.

  2. Some random thoughts.

    A long time ago we bought our first house for about $12,500 and sold it 5 years later for about $22,500. It was about 700 sq feet with no garage on a 40 foot lot. In hindsight…that felt like a bubble. One that has yet to collapse. Perhaps inflation just moves sometimes slow and sometimes fast.

    Don’t give us boomers too much credit about thinking about the new rules and its effect on our housing values. In my experience, most people don’t think that much about such things. We grew up with those rules and still think they were a good thing. It was retarded to change them in the first place.

    Do we really care that much about our housing value? We get to live in our mortgage free home and I expect it’s market value will move more or less with the market so we will “keep my place in the pecking order”. We will still be able to trade it in for a condo, or for a house near the same value somewhere else.

    It is still mortage free no matter what and that is the important money issue. If the bubble bursts only those over extended will get burned. That has always been the case.

    Is there really a cause and effect relationship between boomers and the price of housing? Perhaps, but I would prefer one showed some data to support that theory.

    One of the complicating issues I see is that new homes are a lot larger and more expensive today than they were say 50 years ago. Check out the older parts of your home town.

    No one is building “little houses with no basement and no garage” anymore. Perhaps a per square foot comparison would be more meaningful when looking for real estate bubbles.

  3. Canadian Money made the two points I had in mind: houses today aren’t what they were 50 years ago; and house prices haven’t risen a lot faster than inflation. I found a chart: http://findcalgary.files.wordpress.com/2009/09/newhousinghistorical1.jpg
    I did the math: even with the recent jump, the increase is a little less than 4.4% annualized. That doesn’t feel like a bubble.
    Still, we may see growth flatten as interest rates increase and as inflation “catches up.”

  4. I hope the change wont come to fast… were supposed to see a difference around 2012 (according to stats) but hey, aren’t we used to see that they do nothing like we expect them to? 😉

  5. If I were to speculate, I think we’ll soon see a broad based housing correction in the downward direction; however, I don’t think it’ll be as acute as what we saw south of the border b/c we have more robust lending practices with our banks here in Canada.
    Just my thoughts. Nice post

  6. I think it may be wishful thinking upon the part of those that are not Boomers or not in the housing market. If you look back in our market ( western Canada) real estate growth as an investment has averaged out to approximately 1% over inflation. Not a great investment, but certainly not indications of a bubble. And those records go all the way back to the 50s, before the Boomers came on stream.

    If you look at the actual costs associated with servicing a vacant lot, then the labour and material costs associated with building, costs cannot go much lower unless manpower and material costs come down. As the Boomers retire and labor pools dry up ( the average contractor age is now 52), if anything costs may go up as the competition for workers heats up.

  7. I don’t really see a big burst coming ever. I don’t really like the term bubble for that matter. It’s all just supply and demand in my mind.

    My grandmother stayed in her house until she was 80 and only moved when forced to because of dementia. There is no guarantee that the boomers will exit there houses in a mass exodus.

    If the demand does decrease, there will be less future homes built. Less homes equals decreased supply, so the excess supply would just be a temporary problem and would bring about a small correction.

    Less workers, results in higher wages. Or at least until more workers enter the work force. Higher wages gives us more money to spend and sends prices back up again.

    It’s fun to speculate, but I don’t really see any practical use of it here anyhow. Invest long term. Buy when the masses are selling and sell when the masses are buying. In the long run you’ll come out much further ahead.

    If you aren’t planning on selling the prices are irrelevant too. And like Canadian Money said, “…only those over extended will get burned.”

    Live within your means and the rise an fall of prices will only be an interesting footnote.

  8. Yes, it will correct and it will happen exactly as you have stated in this post. Very good analysis. Now just sit back and wait for it.

  9. @John the Contractor,

    I think John hit on the head. Labour is a key part of a housing price and with oil staying high you won’t see much of a drop in materials. Therefore ‘new’ housing won’t be getting much cheaper.

    @CM

    Very good point that some people won’t move until they have to. So a mass exodus could not happen.

    @Robert,

    Given John pointed out a 1.0% is typical return and the average is your graph is 4.4% over that time period and looking at that price spike at the end I still think it’s a bubble and prices are sustainably above their long term average.

    @ Everyone,

    Could I be wrong? Hell yes, this is the point of speculation. I’m guessing at the future. Thankfully I don’t bother with it too much in a given sub-market. In overall summary I liked the comment “Live within your means and the rise and fall of prices will only be an interesting footnote.” I certainly won’t hold my breath or plan my life around a market correction. Just don’t get in too deep in debt and you will be fine.

    Tim

  10. I see the bubble bursting when boomers start to die en-masse. That would start in maybe 10-15 years, but there will be a lot of vacant houses coming on the market and not that many buyers. Same with a lot of products, not just houses.

  11. This is what’s fun about the whole real estate debate- the differing opinions. Personally, I think that at the end of the day, real estate comes down to affordability. Yet when we look at the graph provided in the link from the earlier comment, I calculate a 7% return from 1997 to today. Clearly wages haven’t grown that quickly to keep pace. When is the breaking point? It’s got to happen eventually, and I think it’ll happen when rates go up this summer.

    That’s just my two cents though and I could be proven spectacularly wrong. It’ll be interesting to watch whatever happens.

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