The Real Deal New York

The next threat to RE prices: demographics

An aging workforce could push savings rates down and interest rates up
December 27, 2017 09:45AM

Jerome Powell

Real estate executives are keeping an anxious eye on the Federal Reserve, but maybe they shouldn’t.

Conventional wisdom holds that when the central bank raises short-term rates, long-term rates also rise, which pushes up the cost of mortgages and puts downward pressure on property prices. But recently this didn’t seem to hold true, the Wall Street Journal reported.

The Fed raised its short-term benchmark rate, the federal funds rate, three times in 2017, but long-term rates remained low. The central bank is expected to raise rates again in 2018.

Some observers argue that long-term interest rates depend not so much on central bank policy, but on demographics. The household savings rate is high, which means banks have plenty of money to lend, pushing the supply of money up and interest rates down. But as the workforce ages, more people may choose to start spending their savings.

It “could happen tomorrow or 10 years from now, but I’m not counting on the latter,” Gavekal analyst Will Denyer told the Journal.

JPMorgan Asset Management calculates that an aging population is already pushing up real (or inflation-indexed) interest rates on 10-year Treasuries up, and that the rate will be 0.75 percentage points higher over the coming decade. [WSJ]Konrad Putzier