Demographics Will Boost Canadian Housing Demand
by Jim Adair
Tuesday, September 11, 2012
After booming for more than a decade, the housing market in Canada is expected to level off during the next two or three years. While some analysts predict home prices will drop, the consensus is the real estate market is more likely to flatten as the global economic crisis sorts itself out.
Recently CIBC's deputy chief economist, Benjamin Tal, issued a report that says demographic shifts in the housing market will help mitigate damage from a market downturn.
"It turns out fears of a long and sharp down turn in the housing market are highly exaggerated and very premature," says Tal. "In fact, demographic forces will be supportive to real estate markets in the coming decade."
Tal says that the last time the housing market stagnated was in the 1990s, when it was "accompanied by a notable softening in demographically based housing demand." He says the average annual growth in demand was only 0.2 per cent during the 1990s due to the impact of the recession. High unemployment, out-migration and a lack of new immigrants pulled down housing demand.
"Assuming that any upcoming adjustment in housing market activity will occur in a non-recessionary environment, demand for housing in the coming decade should be more than four times stronger than it was during the dreary market of the 1990s," he says.
Tal says the next decade will see annual population growth of 0.9 per cent, which is in line with the growth of the last decade.
"From a housing market perspective, what counts is not only the change in population of a given age group, but more importantly, the level of housing market activity among those groups," he says. "In other words, the group that is most likely to buy a house will grow faster in the coming decade."
That's the 25-34 age group, who make up the majority of first-time buyers.
Immigration will play a huge role in Canadian housing demand. Noting that there is "significant jump in the home ownership rate among immigrants as they pass the three-year mark" in Canada, Tal says that after 10 years, immigrants are more likely to be homeowners than native-born Canadians.
The popular view of housing demographics is that those in the 55 to 75 age group are becoming empty-nesters and are ready to downsize from single-family houses to condos and apartments, putting a lot of homes on the real estate market. But Tal says less than one-third of people in these homes actually make the move, and that proportion may be even lower in the coming years because baby boomers should be in better health than their parents and grandparents. They also are more likely to have the financial resources to maintain their current larger homes. Most are just not ready to downsize.
The number of people age 75 plus will increase by 700,000 in the next 10 years, but that is only 200,000 more than the last decade. "It is simply not large enough to flood the housing market with extra supply," says Tal.
He says British Columbia will see the strongest increase in housing demand, "a fact that might limit the degree and duration of the projected correction in housing activity in the province." Ontario will also have above-average demand for housing, followed by Manitoba.
"While the current demographic population projection by Statistics Canada suggests a relatively mild demand for housing in Alberta and Saskatchewan, there are many reasons to believe that net migration to those provinces will be stronger than currently projected – leading to stronger household demand," says Tal.
Scotiabank, another of Canada's largest financial institutions, also recently released a long-term view of the real estate market. It calls for home prices to gradually decline by a cumulative 10 per cent during the next two to three years, with the largest drops in the Vancouver and Toronto markets.
Low mortgage interest rates have driven the market for years, but eventually these rates will start to rise, analysts say. "The vast majority of Canadian households should be able to absorb a gradual rise in borrowing costs over the medium term without a major adjustment, since roughly two-thirds of residential mortgages are at fixed rates," says Scotiabank. "Canadian activity should also be supported by immigration, the strength in selected regional markets such as Alberta and Saskatchewan, and the shift toward a more balanced housing market in other areas across Canada."
Scotiabank says that homeowners' equity in their properties average 67 per cent in Canada compared to 41 per cent in the United States. "Mortgage delinquency rates are currently low and falling. Nonetheless, high personal debt loads…and balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, including a sharp rise in unemployment and/or a sharp drop in home prices."
But Scotiabank says that "a more dramatic correction that rivals the downturns in either the United States or in a number of European countries is unlikely."
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