Cointegrations in house price dynamics and ageing population risks

Abstract

How does the riskiness of an ageing population change with house price dynamics of rural areas? Why do rural house prices increase faster than cities despite their ageing populations? Life cycle theory predicts working age households have higher demand for housing than retirement households. An issue that has seen much less attention in the literature is that rural house prices have been increasing despite their populations age rapidly. To answer these issues, our paper introduces an empirical cointegration-based framework designed to be flexible for empirical settings. Our cointegration framework reveals crucial information about rural housing and ageing which has not been found previously: the short-term deviation of house prices from cointegration restrictions is a strong predictor of future rural house prices and migration rate from 1 to 4 year ahead. This is not the case for urban areas nor where cointegration restrictions are being ignored. Rural house prices, not urban ones, are the key to understand this cointegration restriction. Our framework is pertinent to most ageing societies with available housing and demographic data. When a government formulates macroprudential policies internalizing these cointegration restrictions and supporting rural developments, migration into rural areas and population increases are possible. Our evidence highlights the importance of cointegration-based long-run ageing risks for rural housing markets.