The demographics of housing bubbles
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.