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Economist Says Canadian Home Prices Will Rise

A new report, Much Ado About Nothing: Canadian House Prices Not Based on Demographics Alone, predicts that Canadian house prices are likely to double in the next 20 years, and not drop as some analysts had feared.

Benjamin Tal, senior economist with CIBC World Markets, says that while cyclical forces will continue to influence the housing markets during the next two decades, "our finding is that the widely held fear of a softening in housing market activity and structural downward pressure on prices due to the changing Canadian demographic landscape are largely unsubstantiated."

Tal says that when examining how demographics will impact the market, "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 age groups." For example, he says that first-time buyers in the 25 to 44 age group account for almost 68 per cent of all home purchases. His study shows that group will decline by 167,000 between 2007 and 2026, which is such a "marginal" change that it will not impact housing demand in any significant way.

The largest population decline in the next 20 years will be in the 45 to 54 age bracket, but this group accounts for only 12 per cent of total housing demand.

"And even that limited decline in housing demand will be partly offset by the strong increase in the age group 55 to 74 and its surprisingly high housing market activity," says Tal. Much of the property purchased by this group is in the recreational and investment markets.

Although an increasing number of people will downsize to smaller houses, the trend may not be as pronounced as some people predict. Tal's study shows that many baby boomers will stay in their current homes. Less than one-third of those households of people aged 55 to 75 have moved in the last six years. "What's more, this low proportion might be even lower in the coming 20 years as those baby boomers have more financial assets and are generally in better health than their parents," says Tal.

Although the boomers who do downsize will create more demand for condominium units, "those who expect a significant rise in the price of condominiums will be disappointed," says Tal. "Even if we assume that a full one-third of Canadians age 55 to 75 will move to multi-units (a very strong assumption), this means that, on an annual basis, builders will have to increase supply by 14,000 units, compared to the previous cycle (1987 2006) in order to eliminate all the potential price impact of that extra demand." He says that's not a tall order, given the number of condominium developments underway.

The study says the combination of fewer first-time buyers and the downsizing and liquidation by the older population in the next 20 years means that the housing market will have an extra supply of 250,000 houses. "While at first glace this appears to be a large number, it means an average extra supply of only 12,500 homes a year during that period," says Tal. The previous 20 years saw an average of 180,000 starts per year, so builders would only have to drop to just under 170,000 starts "to completely eliminate any negative demographic influence on house prices," he says.

Many other factors can have an impact on the housing market, but Tal says interest rates will not be a huge factor in the coming 20 years. Interest rates have been at historically low levels for the best part of a decade, and Tal says the anti-inflationary nature of globalization will keep inflation -- and interest rates -- at about the same levels.

Another reason why the housing market will stay strong is immigration. Two-thirds of Canada's population growth since 2001 has been due to immigration, and government policies could allow for even more in the future.

Tal also points to the changing Canadian mortgage market as a possible boost to housing in the coming years. Unlike the United States, which has had products such as interest-only mortgages and extended amortization periods for some time, Canada is only now discovering these products. "One can argue that there is some room for these products to grow without triggering a significant increase in the overall risk profile of the Canadian mortgage market," Tal says.

"We project that the average real house price in the coming 20 years will mirror the performance of the last 20 years," he says. "And assuming a two per cent annual inflation rate, this means that house prices in Canada, instead of falling, will in fact double by 2026." He says the increase will not be symmetrical, and large cities will see even larger increases in home valuations.

---source: Realty Times