Fears of a housing market bust sparked by changing demographics are greatly exaggerated, says a new report.
Instead, Canadian house prices are likely to double in the next 20 years, according to the CIBC World Markets report.
"Fears of a decline resulting from the downsizing and increased liquidations of houses by seniors and the falling number of first-time buyers are highly exaggerated," says senior CIBC economist Benjamin Tal.
Much Ado About Nothing: Canadian House Prices Not Based on Demographics Alone compares population growth between two cycles of housing prices, from 1987 to 2006 and from 2007 to 2026, using Statistics Canada's medium-growth, medium-immigration projection as a benchmark.
Between 2007 and 2026, the projected 167,000 net decline in the number of first-time buyers (Canadians between the ages of 25 and 44) is marginal, at best, Tal said. Since this age group has the largest overall housing demand, accounting for almost 68 per cent of all home sales, this relatively modest downturn will not significantly affect demand.
The largest decline (2.5 million) is projected for the 45-to- 54 age group, as many Baby Boomers move to the next age bracket. But the impact of this change is also expected to be limited, given that the 45-to-54 age group accounts for only 12 per cent of total housing demand.
This decline will be partly offset by the strong increase in the age group 55 to 74 and its high demand for vacation and investment properties.
"We estimate that in the coming 20 years, the Canadian housing market will face extra supply of roughly 250,000 houses," adds Tal.
"While at first glance this appears to be a large number, it means an average extra supply of only 12,500 homes a year during that period."
Since total housing starts during the previous cycle averaged 180,000 per year, builders will only have to reduce new supply to just under 170,000 to eliminate any negative demographic influence on house prices, says the report.
Although housing activity in the coming 20 years will fluctuate, CIBC projects that the average real house price will mirror the performance of the past two decades.
"Assuming a two-per-cent annual inflation rate, this means that house prices in Canada are expected to double by 2026," said Tal. "This increase, of course, will not be symmetrical - with large cities seeing even larger increases in valuations.”
