2/27/2009

The sky is falling, the sky is falling!

In Don Feder's article, "Demographic Winter' Exposes the Century's Overlooked Crisis" the author talks about how population growth across developed countries have been sinking considerably over the last 40 years. The author states that fertility rates have gone down 50% since 1968. In Europe, for instance, the average birth rate is 1.5, whereas the replacement level needed to sustain the population is 2.1. When the baby boomers pass away, coupled with our declining birth rates, is it possible that real estate and equity investments might decline for the majority of our lives? I think not only is it possible, but quite likely. Developed countries require growth, and never in history have we had economic prosperity accompanied with depopulation. Japan is already one step ahead of the U.S., as they never had the baby boomer generation to provide that final push. Japan saw their stock market fall over 80% in the last 15 years and watched real estate slip 60%. If we see the birth rate in the U.S. slip below the replacement level of 2.1, it's hard to imagine how investments/real estate could return anything at all. Maybe Dr. Tufte is correct in saying home ownership isn't such a great and secure investment! http://www.humanevents.com/article.php?id=25723

5 comments:

Dr. Tufte said...

We don't go that far in this class, but a branch of growth theory has looked at this.

They've found that growth rates depend on the level of population not the change of population (or equivalently, the log-level and the difference log-level, or growth rate). This means that our growth (and asset prices) are likely to be in good shape.

Liam said...

I would think that "The Doc." would be right. The level of production would determine long-term demand and prices more so than population. Population goes down, fewer laborers around, fewer skills, higher demand for something specific, while on the whole less. I assume the demand would balance each other into stable prices.

Trevor said...

I find it humorous when people who are ignorant on this issue say, "A decline in population would be a great benefit to those in the future because there will be less competition for jobs, which would increase overall wealth". The theory of supply would suggest otherwise. As population decreases, there would be less market growth and expansion and overall supply would decline with the decline of population. This decline in supply of jobs would increase competition and at best would mirror our current employment rates.

Victoria said...

I think real estate is not secure investment too. As we discuss in the class, it would be really hard to sell the house if the location is really bad. Rent a room would be better decision for people who need to move several time because of work.

Calvin said...

Well according to the Cobb-Douglas model, a decrease in the depreciation rate or in population growth rate would result in a higher capital for the population as a whole. Professor Tufte has told us from the beginning that real estate is a lousy investment and that besides that market, the GDP would actually go up theoretically. Perhaps it's less competition for jobs, better health care systems, less dumb people...