Ben Rabidoux is president of North Cove Advisors, a market research firm. His Canadian Housing, Macro, and Credit Newsletter is read by institutional investors around the world.
If you read the headlines, you’d be inclined to believe that Canada’s population is booming. And, as the story goes, it’s this strong population growth that is providing much of the fuel propelling Canadian house prices to new all-time highs virtually every month. “Supply and demand”, as they say.
It’s a great story, but it’s mostly wrong.
In reality, Canada’s working-age population (15-64 year-olds) is growing at the slowest pace on record, a paltry 0.4 per cent or just one third of the long-term average. In 2010, Canada added 240,000 people to the working-age population. Today that number has dwindled to just 90,000. In provinces like Quebec, that number is actually declining.
An outside observer might note that against a backdrop of an unprecedented decline in population growth, the level of residential construction activity should slow sharply. Curiously, that hasn’t happened.
In fact, in the first quarter of this year, residential investment in Canada hit 7.1 per cent of GDP, the highest level since 1989 (which, coincidentally, was the peak of the last housing cycle). Of course back then, population growth was triple what it is currently, so at that time there was at least some demographic justification for a high level of investment in housing.
Fast forward to today. Housing starts in June hit their highest level in 10 months at just under 203,000 on a seasonally adjusted basis. That level of construction means we’re currently building over two new houses for every person we’re adding to the working-age population.
To frame why that’s potentially problematic, consider the chart below, which shows housing starts as a multiple of the number of people added to the working-age population. You’ll note that in the late 1980s, we were building 1.5 new homes for every person added to this group. It’s clear in hindsight that there was significant overbuilding during that time period, particularly in Ontario where house prices subsequently fell 25 per cent between 1989 and 1993 as supply overwhelmed demand. And that drop occurred in spite of the Bank of Canada cutting the overnight rate by 1,000 basis points (10 per cent) over that time frame, which helped put a floor under prices.
The current level of housing construction in Canada is absolutely unprecedented relative to underlying demographic trends. Some of this phenomenon could be due to demand for new houses from foreign investors. Unfortunately regulators and policy makers can’t seem to figure out how to accurately measure this potential source of demand.
This is problematic since, as you might expect, a near record 7.6 per cent of all jobs in Canada are in the construction industry, so there’s a lot riding on understanding the dynamics behind the current boom. It takes on additional importance as housing has been a source of economic growth at a time when other parts of the economy have slowed. That makes the prospects of a reversal in housing activity back to long-term norms all the more worrisome.Report Typo/Error
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