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Growing fears that Canada's housing market is on course for a severe crash are overblown, say economists at CIBC.
While Canada's changing demographics have led many commentators to warn that downsizing by baby boomers mixed with fewer young home buyers will be the catalyst to a sharp decline in housing prices, CIBC says the exact opposite is true.
"It turns out that those fears are highly exaggerated and very premature," CIBC economist Benjamin Tal says in a report. "In fact, demographic forces will be as supportive to real estate markets in the coming decade as they were in the past decade."
The economists reach that conclusion by looking at both the change in the population of a particular age group and the level of real estate activity among the different age groups. What they found was that while the number of Canadians under the age 25 and in the 45 to 54 age groups are expected to fall, those age groups tend to have a muted impact on the housing market.
"While the projected 170,000 decline in the number of Canadians in the age group 20-24 in the coming decade is negative for housing demand, the low propensity to buy among this age group will limit the damage," he says.
"At the same time, the growth in the number of Canadians in the age group 25-34, which accounts for the vast majority of first-time buyers, is projected to be much stronger. In other words, the group that is most likely to buy a house will grow faster in the coming decade."
By putting those factors together, CIBC expects a 0.9-percent increase in what it calls demographically-based housing demand -- roughly in line with the past decade.
The housing correction in the 1990s came with a softening in demographically-based housing demand, CIBC says, which dropped from an average annual rate of more than 2 percent in the late-1980s to 0.2 percent during the 1990s.
"Assuming that any upcoming adjustment in housing market activity will occur in a non-recessionary environment, demand for housing in the coming decade should be more than four times stronger than it was during the dreary market of the 1990s," Tal says.
An increase in immigration is also expected to boost the housing market, according to CIBC, as home ownership rates for immigrants ten years after they have arrived are higher than among those born in Canada.
"So, while housing market activity is projected to soften in the near-term, the good news is that any adjustment will not be aggravated by negative demographic forces," Tal says. "In fact, at least for the next decade, demographic forces will be strong enough to mitigate the damage and probably shorten the duration of the upcoming market adjustment."