August 22, 2012
A downturn in the housing market may not be as bad as feared because the important 25-34 age group will continue to buy houses — some with help from their well-off parents, says a senior economist at CIBC World Markets.
The analysis takes aim at a theory that population growth won’t be strong enough to sustain demand, putting downward pressure on housing prices that have risen dramatically during a years-long period of low interest rates.
“This demographically driven fear is much ado about nothing,” Benjamin Tal, deputy chief economist at CIBC World Markets, said Thursday.
Demographic projections suggest there will be fewer Canadians under the age of 25 and between the ages of 45 and 54, but Tal notes those groups account for a small portion of home buyers.
This is actually the first generation that the parents are better off than the kids and those parents will write a nice cheque
Tal said the group aged between 25 and 34 — the age group that makes up the vast majority of first-time buyers — will continue to grow.
While that growing population of young people may have to postpone buying a house for a couple of years due to their student debt level, their parents can help them out, Tal said from Toronto.
“Many of those young people, they’re lucky, they have wealthy parents,” Tal said in an interview after his housing report was published.
“This is actually the first generation that the parents are better off than the kids and those parents will write a nice cheque,” he said. “The student debt level is not significant enough to really kill the housing market.”
This group of young people also have the option of living with their parents while paying down their debt and saving for a down payment, he said.
Tal said once they move out, the younger generation will be “extremely dynamic” in terms of self-employment and being employable, which will help them buy houses.
“They will be employable, they will work and they will make money.”
But Capital Economics economist David Madani said while the 25-34 age group is helping drive sales they are more vulnerable to downturns.
“Right now, if a younger person has put down a small deposit on a home, let’s say in the last couple of years, obviously they are the most exposed to a price decline,” said Madani, Canada economist at the Toronto-based Capital Economics.
“So they could see the little amount of equity that they do have in their homes go up in a puff of smoke. That leaves them significantly under water.”
Madani said average house prices in major cities such as Toronto, Vancouver, Montreal, Ottawa and Calgary could drop by 25% in the next couple of years.
The Canadian average price for homes sold in July 2012 was $353,147, down two% from the same month last year. Excluding Greater Vancouver from the calculation, the average was up 1.1% from a year ago.
It’s harder for younger people to buy homes because mortgage lending rules have been tightened, he said.
“I’m sure there’s some fraction out there whose folks belong to richer families and therefore their mum or dad gives them a deposit,” said Madani.
“That’s all well and good, but what happens when house prices begin to fall?”
But Tal also sees immigrants continuing to contribute to home ownership in Canada.
With more of an emphasis on skills when they come to Canada, they will be more employable and have money to buy houses, he said.
“In fact, after 10 years in Canada the propensity among immigrants to own a house is higher than among native born Canadians,” Tal said in his report.
He expects a correction, or lowering, in housing prices will not be seen as “being up in the sky” and should follow inflation.
Tal added that growth in the housing market could be even stronger due to immigration.
Overall, the CIBC economist said the next decade will see an annual population growth of 0.9%, in line with growth seen in the past decade — a period of strong demand for residential real-estate and a sharp jump in housing prices.
“It’s not about everything is rosy, it’s about what is after the storm clouds.”
He said the 1991 downturn in the housing market was accompanied by a severe recession and demand for housing went down.
The Canadian Press