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Demographic forces will keep housing market strong
Aug 31, 2012

 

The Canadian housing market may soften slightly in the near-term, but there’s no danger of a collapse, according to a new report by CIBC.
“It turns out fears of a long and sharp down turn in the housing market are highly exaggerated and very premature,” said Benjamin Tal, deputy chief economist at CIBC. “In fact, demographic forces will be supportive to real estate markets in the coming decade.”
In his Consumer Watch report, Tal wrote that while there will be a decline in the number of Canadians under the age of 25 and those between the ages of 45 and 54 buying a home, those age groups account for a relatively small portion of Canadians looking to buy a new home.
However, he added, the number of Canadians between the ages of 25 and 34, the age group that makes up the vast majority of first-time buyers, will continue to grow.
“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,” said Tal. “In other words, the group that is most likely to buy a house will grow faster in the coming decade.”
At least for the next decade, demographic forces will be strong enough to mitigate the damage and probably shorten the duration of the upcoming market adjustment, according to the new report from CIBC World Market Inc.
The report noted that the correction and subsequent stagnation in the housing market in the 1990s was accompanied by a notable softening in demographically-based housing demand with average annual growth in demand slowing from well over two per cent in the late-1980s to an average of close to 0.2 per cent during the 1990s. That reflected the impact of the recession and the jobless recovery on population growth mainly via out-migration and a notable reduction in the number of new immigrants during that period. 
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.
Overall, Tal said the next decade will see an annual population growth of 0.9 per cent, in line with growth seen in the past decade.
Growth in the housing market could be even stronger due to immigration. Tal said that most of the growth in population is now due to immigration and it is clear that public policy on that front will be a major force that will impact housing demand. It is likely the actual pace of immigration growth in the next decade will be faster than currently projected due to changes in immigration policy.
“What’s more, there is a significant jump in the homeownership rate among immigrants as they pass the three-year mark. In fact, after 10 years in Canada, the propensity among immigrants to own a house is higher than among 
native-born Canadians,” added Tal.
Tal said Manitoba will experience above average housing demand in the coming decade due to an influx of immigrants.
The report also tackled the issue of potential downsizing by Canadians aged 55 to 75, suggesting that less than one-third of households at that age group actually downsize, and this number could be even lower in the next decade as baby boomers have more financial assets and tend to be in better health than previous generations.
Putting all this information together, little change in demand relative to the past decade and the increased supply due to downsizing and liquidation, it appears that any extra supply of housing due to demographic forces will be trivial at best and can be easily dealt with through a marginal reduction in housing starts.