House Prices

Everyone in the UK seems obsessed with house prices. so I figure it makes a good first financial post.

I found a factor affecting house prices that almost everyone overlooks, especially in the media: Population, or rather, the population contributing to the housing market.

I've often seen comments like "the population is always increasing" and "people always need houses". Hence, the conclusion is that house prices always increase.

However, think for a moment about who is buying the houses. I think it's safe to assume that it's not, for the most part, anyone under the age of 18. I think it's also safe to say that anyone older than retirement age will typically be selling / downsizing / emmigrating. That leaves people in the 18 - 65 bracket. I think it's also safe to assume that those who contribute the most to the housing market, in terms of both volume and value, are those in the middle of this age range: those who have worked their way up to a decent salary; the ones who are perhaps considering buying a second home as an investment.

Enter a paper written in 2005 by a member of the US Fed:

IFDP847.PDF

I don't pretend to understand the maths in this paper but if you read the beginning of the paper and scroll to the last few pages, you will see that, using simply the population of working age as an input, the price of houses in the US, Japan and the UK has been pretty accurately modelled.

Bear in mind that this paper was written in 2005, before the "Credit Crisis".

What does this mean for the UK's house prices? Check this out:

Interactive Population Pyramid

Moving this to 2010 shows a distinct bulge centred around the 45 year olds. Moving forwards in time, this means that the population of middle age (and let's assume major contributors to the UK's housing market) is falling.

Add this to the heady mixture of VAT increases, wage freezes, public spending cuts and I can only see one way for house prices to head for the next few years.

I'll post a graph later showing the uncanny correlation between the middle-aged UK population and house prices...

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