The paper investigates how ageing will affect asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing.

Ageing is global. Advanced economies are ageing fast and emerging economies are closely following them. The old age dependency ratio, the ratio of old to working age population, is expected to almost double in the United States by 2050. And ageing is much faster elsewhere. Perhaps Germany and Japan are the best known examples, but ageing is not limited to advanced economies. China will be older, in terms of median age, than the United States by 2025. These ageing economies account for the overwhelming majority of global investable assets. And economic theory suggests that ageing can drive asset prices down.

The question naturally arises: What will happen to asset prices? Will ageing lead to a global asset price meltdown? This paper finds that ageing will affect asset prices significantly negatively, but an asset price meltdown, as predicted in Mankiw and Weil (1989), is unlikely. The paper identifies the impact of ageing through the analysis of house prices. It finds that demographic factors contributed positively to real house prices in many countries in recent decades. For instance, the United States is estimated to have enjoyed around 80 basis points per annum demographic tailwinds in the past forty years compared to neutral demographics. Looking ahead, forecasts of the demographic component for the next forty years, based on United Nations (2008) population projections, uniformly point towards substantial demographic headwinds. For instance, the impact in the United States is estimated to be around 80 basis points per annum. European economies and Japan are expected to face even stronger headwinds. Based on the analysis, global asset prices could face up to a full percentage point lower return per annum than under neutral demographics.