The influence of demographics on real interest rates and house prices

This paper complements and extends the research of Lu & Teulings (2016). I investigate the effect of demographics on real interest rates and house prices for six developed countries by using their stylized overlapping generations model. The current demographic structures, which consist i.a. of a baby boom followed by smaller cohorts, are far from a balanced growth path, in which real interest rates would equal population growth. The relatively large cohort causes the population to be biased towards saving. Oversaving results in the real interest rate undershooting the new lower population growth/decline. The low real interest rates are most likely to stay until 2030. This result is backed by observing Japan where the demographic transition took place 15 years earlier. Finally, I find that the growth of a bubble is a natural and efficient response to the asset shortage and low interest rates and consistent with the observed increase in real house prices over the past decades.