Home  Blog Real estate collapse not looming, after all
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Real estate collapse not looming, after all |
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Saturday, 28 April 2007 |
Real estate collapse not looming, after all
An analysis by one of the country's best-informed watchers of household financial trends concludes that Canadian housing prices will probably double over the coming 20 years.
This bit of intelligence, from Benjamin Tal, an economist with CIBC World Markets, is happy news for those who are still worried by the idea that an aging population necessarily leads to a real estate collapse.
It's hardly a good reason to consider housing a hot investment, of course. For an investment to double over 20 years, it need rise by only about 3.5 per cent per year. This means Tal is predicting a smaller average return on a home than on the stodgiest of government bonds -- and a much less certain one.
Still, it's helpful for Tal to remind us that our most valuable possession is not nearly as vulnerable to collapse as some would suggest.
He says he's been a little surprised recently by the number of acquaintances and CIBC clients who ask if they risk serious losses as baby boomers retire and sell their homes. This scenario was set out several years ago in a bestselling book by University of Toronto economist David Foot and even earlier by a couple of U.S. academics.
Now, for whatever reason, it seems to have come back. One reason could be the distress we see in the U.S. housing market, although this is a very different phenomenon.
And Tal guesses the worry has to do with some people thinking that prices today seem much less affordable than when they bought many years ago, so they could be headed for a bust. From there, it's only a short step to seeing the latest headlines about an aging population as the trigger.
On the surface, this seems a reasonable fear. It's true that, over the coming two decades, the population will age as fewer youngsters under 25 set up households and the huge boomer generation moves into retirement.
So couldn't this point to a housing meltdown?
Nope. Analysts have looked carefully at the demographic bust theory over the past decade and they've driven several stakes through its heart.
One is that people don't immediately sell their homes and move into a nursing facility at the age of 65. The opposite is true.
The home ownership rate among those older than 65 is in fact higher than among younger people, found John Krainer, an economist with the Federal Reserve Bank of San Francisco. And it's been rising, perhaps because geezers are healthier and more active than ever before.
Tal finds that while some retirees move into smaller homes, retirees also have the highest rate of ownership of vacation cabins and other second homes.
As well, the biggest influence on housing prices is real incomes, not demographics, according to a study by economists Mario Fortin at the Universite de Sherbrooke and Andre Leclerc at the Universite de Moncton. Real incomes have been rising and this is very likely to continue.
Fortin and Leclerc did find one demographic influence, however. The number of those between 25 and 54 has some influence on home prices.
But this group will shrink only marginally over the next 20 years, according to a federal demographic projection. And Tal suspects that this projection underestimates the likely positive impact of immigration.
Add it all up, and Tal calculates that demand for housing will drop only a little over the coming two decades. And he adds a crucial point that the demographic determinists apparently forgot: Price depends on supply as well as demand.
Homebuilders are very quick to adjust to any slackening of demand. In this case, Tal estimates that over the coming two decades, they'll keep the market balanced if they merely build about six per cent fewer homes on average than they did from 1987 through 2006.
That very small correction should be "no problem," he says.
And this means that the big influences on the housing market will remain similar to what they've been in the past.
Prices will go mostly up and occasionally down. But the long-term trend should be gently upward.
(prepared by Jay Bryan, CanWest News Service/Vancouver Sun)
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