The demographics of housing bubbles

By Felix Salmon
June 9, 2010
profile of Ed Hugh, who has been blogging for as long as I can remember, and who is an indispensible voice in the econoblogosphere. Hugh's blog entries can be quite long, and I love the way that Thomas distilled one of a key argument:

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I like Landon Thomas’s profile of Ed Hugh, who has been blogging for as long as I can remember, and who is an indispensable voice in the econoblogosphere. Hugh’s blog entries can be quite long, and I love the way that Thomas distilled one key argument:

“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more.” …

Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries.

By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust. Wages were pushed up, encouraging spending but soon making it all but impossible for their industries to compete with the thrifty Germans, Dutch and other northern Europeans.

Are economies with a younger population really more likely to have a housing bubble? I’d love to see some empirical data on that. I can believe that California’s Inland Empire, and Las Vegas, are younger than much of the rest of the US — but what about Florida? But in Europe, I think that Hugh has hit on something important here: while we can intone gravely about Teutonic fiscal sobriety, a lot of what we’re seeing is simply demographic.

In the very long term, the younger countries of Iberia and Ireland (not to mention many of the newer Eastern-bloc entrants to the EU) will do wonderful things for Europe’s demographics and economic health: no one wants to see Europe turn into Japan. But in the short term, they’re a huge problem, which no one is tackling head on. As Hugh wrote, presciently enough, back in September:

I personally take the view that the global financial and economic crisis is far from over. There is another stage yet to come, and the focus of the problem will be Southern and Eastern Europe.

Good for him that he’s finally getting the mainstream recognition that he has long deserved — and long received, in the blogosphere.


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I don’t think the Housing Crisis has more to do with the culture of the country and the interest rate policy of the Central Banks.If demographics was a big cause then Africa and India would have massive bubbles.

Posted by AGreenInvestor | Report as abusive

I agree with the previous comment. Ascribing property bubbles to young demographics is perverse. Look at the U.K.: massive property bubble but first time buyer numbers were and still are at record lows. People spending what they do not earn is possible in all demographics that have access to credit.

Posted by ed33 | Report as abusive

“Are economies with a younger population really more likely to have a housing bubble? I’d love to see some empirical data on that.”

All good things come those who wait :) … I am preparing a paper on this very topic at the moment. In general, I would say that there is a definitely a correlation between housing bubbles and “a certain demographic profile” … They key is to find out what that demographic profile is exactly, but theoretically it finds pretty solid backing in the idea of a life cycle/life course (i.e. consumption/purchase, savings, and credit demand as a function of age).


Posted by clausvistesen | Report as abusive

Quite surprised that you would be touting this person. Aside from chronically suffering from the (very common) illusion that press reports can be used as data points; that he constantly shows an inability to even look at – let alone understand – the underlying data before making a doom-laden pronouncement and that he always substitutes histrionics for analysis, Mr. Hugh is one of the blog world’s biggest spamdexers.

What the NYT characterizes as ‘…writes for a suite of blogs…’ is, in fact, ‘…crossposts to a suite of blogs…’. The end result is that Google searches for country specific economic analysis constantly turn up multiple repeats of the same articles written by the same Mr. Hugh. The One True Truth personified.

Outstanding amongst his contributions was his conclusion that Spanish housing projects not yet started, but with planning approvals in place, should be counted as residential stock. A simple, but effective, method of increasing the Spanish inventory by a factor of two to 3 million units. Even Ambrose Evans-Pritchard, when he dealt with issue with the same data before him, could not bring himself to come to the same conclusion. It takes some doing to beat out Ambrose in the histrionics game.

Posted by IbexSalad | Report as abusive


On the comments before mine. You are thinking about this all wrong. Think the ABSENCE of a housing bubble. Why didn’t Germany and Japan have one even though they also had record low interest rates.

“People spending what they do not earn is possible in all demographics that have access to credit.”

Access yes, but what about the DEMAND for credit (leverage). Surely this has something to do with demographics. Ah well, I digress … I will let the data speak for itself.


Posted by clausvistesen | Report as abusive

Well everyone is entitled to his opinion of course Charles :) … but yes, Edward certainly understands how Google works, that is for sure.

Anyways … I thought that I would clear up the misunderstanding of “Young Iberia”. Iberia is NOT young but in fact old which is exactly why they cannot grow themselves out of this mess and why they need exports to do so.

Basically, Spain got 5-6 million new people in as many years and that greatly contributed, in my opinion, to the boom and the subsequent bust. However, now that they start to leave there is no internal engine left for growth just a competitiveness problem. Greece is different here since the main problem here is public debt (and not private as in Spain).

Basically, Greece did not have a housing boom in relative terms to spain

Change 00-08 in value of GDP(construction)

Greece: 59%
Spain: 171%

OECD av. about 75%

Now, demographics are NOT destiny, but please look at the underlying theoretical argument here. It is not as if we are shooting arrows into the abyss here.

Posted by clausvistesen | Report as abusive

No Claus – that would be how Google fails to work. Fortunately it doesn’t happen too often outside the realm of selling gland enlargement supplements, and the like.

Spamdexing is taboo.

With regards to the housing bubble, its origins lie in the change from the peseta to the euro. It was widely believed that cash money exchanged would have to accompany a justification of the source of the funds. As 2002 approached, everyone took out their hoards of hot potatoes proceeding from the grey economy and bought anything that permitted the real price to be concealed. That anything was property. Spaniards inherently believe that real estate is a safer store of value than money, so it takes only the slightest improvement in the real estate market to get everyone on the same side of the boat.

The new immigrants, most of whom are not eligible for loans in normal times, only became a factor as the bubble aged and the banks that funded all the construction found that the normal domestic market was not infinitely large. That, beginning as early as 2005, was when they reached way out on the risk curve to salvage an untenable commercial loan situation.

As always, nice to hear from you.

Posted by IbexSalad | Report as abusive

This is all a bit too clever by half.
The EU countries are not ‘converging’ because they represent 24 different cultures, 22 largely unshared languages and 27 different points on the economic cycle.

They have differing attitudes to the State, the arts, the civil service, human rights, voting systems, taxes and of course legal processes.
The only things converging in the EU are the clones it employs in Brussels.
My own view is that they assemble the parts in China and then ship them in quietly via a deserted Dunkirk beach – where they are wired up with Belgian attitudes to national identity – ie, set at zero.

Now Von Rompuy, democracy’s quiet assassin, wants us all suddenly to converge….so he can have all of us present our plans drawn up by elected legislators – upon which he the 100% unelected President can then scrawl with a red pencil, vigour, insouciance, and impunity.

This isn’t going to happen- or rather, Britain will NOT join in with this. It’s about the only issue upon which there is a total consensus here. ch-o-happy-day-for-european-project.html

Posted by nbywardslog | Report as abusive

It seems to me that a bubble could start in an area with older population if there was a constant inflow of residents. After all, it’s not so much the youth that is important in the story it’s that people who did not previously own a house in the area are now looking for one (Increase in demand for housing).

Posted by vgalis | Report as abusive