Despite metrics that suggest housing affordability in Canada has suffered only marginally over the past few years, it did in fact fall off of a cliff some time ago, but the rapid aging of our population promises to reverse the trend.
RBC puts out a quarterly affordability index that tracks how much of a typical Canadian household’s annual pre-tax income is required to carry the costs of owning a home. These costs include mortgage payments, utilities and property taxes. RBC’s last report in May found that, on average, housing affordability suffered only marginally in the first quarter of this year compared to the previous year.
The RBC report is a great read and it does provide insightful breakdowns by region and housing type – these are important because housing costs, as well as average household incomes, vary greatly from city to city and between urban, suburban and rural housing markets. But many critics took RBC’s latest numbers to task because of one crucial factor – mortgage rates remain at historic lows. If mortgage rates were to increase, affordability would quickly deteriorate. In its report, RBC acknowledged this could become a significant issue should the Bank of Canada start hiking interest rates toward the end of this year.
A whole new spin on inflation
Another, and more perhaps much more telling way, to track housing affordability is to chart average selling prices against annual increases in Canada’s key measure of inflation, the Consumer Price Index (CPI). For example, let’s look at the Ottawa housing market, using resale data from the Ottawa Real Estate Board.
If we look at the 10-year period ending in 1989, the average resale price of a home in Ottawa increased by about 119 per cent, while the national CPI increased by 70 per cent. For the 10-year period ending in 1999, resale prices moderated, for a total increase that was far less than the CPI – 5.7 per cent versus 18.5. However, in the following decade, resale prices shot far past the rate of inflation, for a 10-year average gain of 92 per cent versus 20 per cent.
Here’s another number from Statistics Canada: the percentage of personal income that Canadians put into personal savings peaked in 1982 at just over 20 per cent. That figure has since fallen to less than five per cent. Increased housing costs must be at least partly to blame. In fact, when the personal savings rate was at its peak in 1982, home resale prices in Ottawa and the national inflation rate were only marginally apart, at 9.5 per cent and 11 per cent respectively. When the cost of buying a home contracted in the early 1990s, Statcan charted a temporary improvement in the personal savings rate.
What goes up …
But the big story is found in what is yet to come as the baby boomer generation enters its golden years.
The boomers will affect the housing market in two ways — one is downsizing to smaller and more easily maintained housing units and the other is exiting the market through death. According to the latest census data from Statcan, there are 9. 81 million boomers, those aged 46 to 66, representing almost 29 per cent of the total population. Based on average life expectancy, about 17 per cent of these individuals will no longer be alive in 15 years. The remaining 8.11 million will either remain in their current residence, or will have chosen to downsize. The Conference Board of Canada forecasts that about 80 per cent of new housing demand by 2030 will come from seniors. The Board also forecasts that the demand will be for easier-to-maintain multiple dwelling units, with this residential property type to account for 68 per cent of all housing, compared to the current figure of about 47 per cent.
Meanwhile, the age group behind the boomers, those aged 26 to 45, account for about 27.4 per cent of the population, or 9.453 million individuals. Most of these folks will be alive in 15 years and will have moved past the first-time home-buyer phase of their lives. In fact, many of them will be where many boomers are now — looking to downsize. But there will already be a surplus of inventory moving onto the market from the boomers.
What does all this mean? Aggregate demand in the housing market will decline with a corresponding effect on housing prices.
There are only two obvious variables which could offset this. The first would be a substantial increase in Canada’s birthrate, but this is highly unlikely.
The second would be an increased rate of immigration, which is reasonably likely. Immigration has emerged as a key federal policy initiative to overcome the labour shortages which are expected to become more acute as the boomers retire. Based on historic patterns, immigration is most likely to buoy the housing markets (and housing prices) in Canada’s 10 or 12 largest urban housing markets, led by Toronto, Vancouver and Montreal, since this is where the majority of immigrants settle. It is rural and smaller urban markets that are likely to feel the pinch of weakened housing demand the most.
But there is no guarantee that immigration will offset the negative effects of an aging population and a declining birthrate in the housing markets of Canada’s largest cities, either. Canada isn’t the only western industrialized nation eagerly courting foreign talent and as the middle class continues to grow in various emerging economies, there may be fewer immigrants to court.
Are we likely to see a dramatic pullback in Canada’s housing market in the next decade or two? Perhaps, perhaps not, but we are facing major demographic shifts that will curtail demand and serve to moderate prices.