What happens when baby boomers start to sell their assets to fund their retirements?
This is the question many are asking as they wonder why so much cash is being hoarded in bonds, why stock markets are so weak and why consumers seem so reluctant to spend all around the developed world.
The San Francisco Federal Reserve has just released a study showing the link between the ageing population and falling share prices. The results are unsettling.
It essentially says the rally in stock markets through the late 1980s and 1990s was closely connected to a surge of baby boomers moving into the stock investing age of 35-50.
As they enter retirement over the next 15 years, these baby boomers are expected to follow the 'life cycle' investing theory and start selling stocks and buying less volatile (but more cash producing) assets such as bonds. It explains why the price of safe US Treasury bonds are up and yields down.
The study forecasts weaker stock earnings until close to the year 2030.
What does this mean for New Zealand? Most New Zealand baby boomers sank their growth savings into housing through the 1990s and 2000s, or into their own businesses, rather than stocks. Firstly, they lacked faith in stocks after the dramas of the late 1980s. Secondly, investors lacked choice on the stock market as many of New Zealand's largest companies were sold into foreign ownership and new companies found other ways to find capital.
This focus on property was turbo-charged through the mid 2000s as baby boomer investors leveraged the equity in their homes to buy rental properties in the hope of making tax-free capital gains and then a solid income from rental returns in retirement. House values almost tripled to $600 billion between 2000 and 2010.
Household debt more than doubled to $184 billion. Household investment in stocks here and abroad rose just 29 per cent to $53 billion.
So what happens now? Will baby boomers sell their rental properties to boost incomes in retirement?
Will they downsize from their suburban homes to empty nest apartments and put the difference into bonds or term deposits? Will they sell their own businesses and houses to younger generations?
Some people worry a mass exodus from property by baby boomers may suppress prices. I think this is unlikely.
Economist Andrew Coleman of independent economic research group Motu has done research into what might happen.
His modelling suggests that without a change in New Zealand Superannuation, our property-favouring tax system or our publicly-funded healthcare system, the baby boomers will hold on to suburban homes and rentals. Rather than sell and realise a loss, they will stay as a landlord and pass wealth to their children upon death.
That presents a few problems for the young. Property prices of suburban homes in the big cities will remain out of reach unless they take on crushing debt. Any young entrepreneurs hoping for capital to fund growth will have to find trusting friends and family to invest.
The one saving grace is that the drive by investors for safety in bonds keeps interest rates low.
This trend away from investing in companies for growth will, however, suppress economic and employment growth and, ultimately, wealth.