Demographic trends built up our housing market, and now they're going to start pulling it apart.
Prepare yourselves, buyers and sellers. The years ahead for housing will look nothing like the last decade.
A report issued by Pacifica Partners Capital Management in B.C., describes the housing market as we know it today as a product of a wave of buying by baby boomers in their peak earning years. Now, as they start entering retirement, boomers aren't buying houses any more and the younger generation isn't large enough to pick up the slack.
Anyone still think the housing market's going to snap back from the weakening trend that has taken hold in the past couple of months? It's not, so act accordingly. Adjusting our expectations about housing won't be easy because we've seen prices rise dramatically. Canadian Real Estate Association numbers show an average annual price gain of 7.7 per cent over the past 10 years on a national basis.
Aman Bhangu, Pacifica's vice-president of research, said real estate has performed a lot like stocks did before the twin stock market crashes of the past decade. "At the end of the 1980s and 1990s, you had that mantra of 'buy and hold, stock markets always go up, just get in there.' It's likewise with real estate – 'real estate always goes up.'"
Mr. Bhangu said that taking a fresh look at the fundamentals supporting the real estate sector suggests prices are overvalued today by one-third, while other estimates call for a price decline of 10 to 25 per cent from current levels. Forecasts like these are educated guesses, whereas the demographic impact on housing is rooted in basic numbers.
Pacifica's report says people aged 45 to 64 used to account for just below 20 per cent of the population. In the 1990s and 2000s, however, this cohort claimed an additional 10 per cent of the population. In round numbers, there are 4.3 million more 45- to 64-year-olds now than there were in 1990. Most housing bubbles in the industrialized world have occurred after sharp growth in the number of 45- to 64-year-olds, Pacific said in paraphrasing research issued last fall by the French bank Société Générale.
In previous generations, the supply of young people in Canada was big enough to replenish the gaps created as older workers moved into retirement. Now, with baby boomers such a disproportionate part of the population, there's a shortfall.
Young adults buy starter homes from people moving up to the more expensive houses where boomers live. Gen Y, you've just been handed the perfect comeback the next time a boomer dismisses your complaints about high tuition costs and a tough job market. Just say: "Good luck selling your house, old timer."
Mr. Bhangu said immigration could help support the housing market as boomers age, but he's unsure how much of the impact of shifting demographics can be overcome. A key question is whether the job market in Canada can sustain the level of immigration needed to maintain equilibrium in the housing market.
Here's what Mr. Bhangu suggests if you're a boomer who has ideas about selling the family home any time soon. Consider all your financial assets and savings, and determine how much you're depending on the value locked in your home to meet your financial goals. If your home is a dominant part of your net worth, think about selling it now so you can diversify your holdings.
Mr. Bhangu said young people shouldn't dismiss renting for the near term, in part because it gives them mobility in finding a job. Those who want to buy a house need not feel as if they have to rush into the market now, before house prices climb out of reach. "At this time, there's more risk going in than there is in holding out."
That's the investing point of view on home ownership. Before the rapid increase in house prices of the past decade, people generally bought houses for lifestyle reasons. If that's your view on owning a home and you figure on staying for 10 years or more, then ignore demographics and focus on affordability.
Here, there's good news. Housing prices are under pressure as sales decline, and a five-year fixed-rate mortgage can be had with minimal hassle for roughly 3 per cent. Only buy a house you love, though. It'll carry you through the days ahead when people talk about what a terrible investment housing is.