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News: Canadian market 'changing'

Mon, 04 Jun 07

An aging Canadian population and increasing immigration will bring significant changes to the country’s housing market, a report released Monday suggests...

Short-term cyclical factors will slow Canada’s housing market over the next several years, according to the latest Real Estate Trends from Scotia Economics, while long-term fundamentals, including slower population growth, will dampen demand.

According to the report, the average annual rate of population growth will slow to just 0.8 per cent over the coming decade, reflecting an aging society and historically low fertility rates.

"This less favourable demographic trend does not in itself pose a major risk to the housing outlook," said Adrienne Warren, senior economist with Scotia Economics. "Real household income growth and the level of interest rates have a statistically more significant influence on housing sales and price appreciation."

Yet the moderation in housing demand comes as affordability is at a cycle low, supply conditions are better balanced and pent-up demand has largely been met, potentially reinforcing the industry’s more subdued prospects, the report suggested.

"Demographic shifts will also influence the type of housing in demand," added Warren. "In particular, the changing age structure of the Canadian population and the growing significance of immigration will likely favour certain forms of housing and certain geographical areas."

Low population increase to have an impact

The Canadian population aged 25 to 44 years — those with the highest probability of buying a home in any given year — is projected to increase by just two per cent between 2006 and 2016, the report noted. All of the growth will come from the youngest in this cohort (aged 25 to 34), reflecting the maturing of the baby echo generation, it added.

"These buyers, many of them singles or young professional couples, should support continuing moderate demand for entry-level homes and condos, particularly in urban centres close to employment opportunities," said Warren.

The population aged 35 to 44 years (the smaller baby bust generation) is expected to decline in absolute numbers over the same period, the report said. This group encompass both first-time buyers and households in their early "trade-up" years, it added. They are more likely to have young families and favour larger suburban homes, a real estate segment that could underperform, the report noted.

’Downsizers’ could dominate the market

The number of Canadians aged 45 to 64 years is projected to rise by 15 per cent, while Canadians 65 and over will jump by 65 per cent, the report said. Even with the higher level of housing market activity of younger Canadians, the number of sales involving late-stage "move up" buyers and "downsizers" could dominate those of more traditional homebuyers, it added.

"While the lifestyles and housing needs of these more mature homeowners vary widely, an aging population should favour new construction over resales, lower maintenance options such as condominiums, second homes and vacation properties, and urban areas with greater amenities," said Warren.

"Immigration will also play an increasingly important role in shaping housing demand," Warren added. "Immigration has been the dominant source of household formation since the early 1990s, a trend that will accelerate over the coming decade as the rate of natural population growth continues to slow."

International migration set to increase

Net international migration is expected to account for over two-thirds of Canada’s population growth between 2006 and 2016, something not seen since Wilfrid Laurier was prime minister, the report noted, adding immigration could be Canada’s only source of population growth by about 2030.

Relatively weaker earnings growth compared to native-born Canadians is a possible factor behind the difficulty faced by some recent immigrant households in making the transition from renter to homeowner, the report said. Immigrant families are also more likely than native-born Canadians to locate in major cities where homeownership rates in general are lower and home prices higher, the report said.

"More than one-third of foreign-born residents in Canada’s largest urban centres have been in Canada for 10 years or less. This suggests a significant pool of potential homebuyers ready to enter the Canadian real estate market," said Warren.

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