Is A New Housing Bubble Being Formed?

WRE News

Is there another housing bubble on the rise? A report from the Indiana University Kelley School of Business is predicting a brand-new housing bubble is in the making.

In their article “Prepare for a Generational Housing Bubble,” Phil Powell, clinical associate professor of business economics, and Matt Kinghorn, senior demographer at the Indiana Business Research Center, claimed current residential real estate demand is driven in part by population – which could be the proverbial recipe for disaster.

“Plainly put, a generational housing bubble is on the horizon,” the authors said in Kelley Real Estate Outlook, a new research publication from the Indiana Business Research Center and the IU Center for Real Estate Studies. “New housing built now to meet strong demand may sit vacant in a decade.”

Powell and Kinghorn warned, “Demographic variables will become as important as interest rates, income growth and construction costs in determining the return on real estate assets. At present, demographic pressure on housing markets is at its peak. This implies continued strain on supply in the next several years followed by long-run erosion in demand that can only be reversed by high levels of immigration.”

But the authors theorized that supply will eventually outpace demand.

“The current bubble in demand generated by millennials will slowly deflate, as baby boomers downsize their living space and age out of the housing market,” they said. “Falling fertility rates mean post-millennial generations will be smaller.”

The authors added the rate of new household formation is greater than the rate of total population growth – but if the rate of new household formation falls, the quantity of houses put back on the market by seniors will become greater. As an example, they pointed to central Indiana where the population of homeowners ages 55 or higher in 2021 was nearly 50%, up from 36% two decades before. Absent of a sudden spike in population inflow, they said, residential real estate in Indianapolis will see peak in demand within the next decade.

The report is now available online.