As Canada's housing starts continue to defy the doubters, there's a temptation to wonder if we aren't just running on thin air, Wile E. Coyote style. After all, plenty of other high-flying housing markets in the developed world plunged to the canyon floor in recent years. Yet the evidence suggests Canada's housing sector actually has some solid bedrock beneath its feet – and it's built, increasingly, on immigration.
Tuesday's monthly report from Canada Mortgage and Housing Corp. showed housing starts at an annualized rate of 194,000 units in September, up from 184,000 in August. For many observers, this reflects a stubbornly overheated Canadian housing market that has been overbuilding for years and is destined to end, quite possibly badly.
But let's consider that maybe, just maybe, this isn't an artificially bloated disaster in the making. There is a substantial base of underlying demand in Canada that differs from some of those bubbly foreign housing markets of recent infamy.
The number of households in this country has been going up at a rate of about 1.4 per cent a year for roughly the past two decades, with surprisingly little change. This pace implies that, from current household levels, the country is now creating in the order of 180,000-185,000 new households a year. On top of this, second homes and other non-principal residences have grown at an annual pace of about 25,000 in the past decade, CMHC says.
A couple of factors have helped maintain a strong pace of household formation, even as demographics imply that a shrinking portion of the population would be reaching that move-out-on-your-own stage in life. For one thing, we have more people spread out among smaller households. In 1961, roughly half of all Canadian households had four people or more in them. By 2011, nearly two-thirds of Canadian households had two or fewer people; more than a quarter were single-person homes.
The other critical factor – and perhaps the most important driver for sustaining the housing market going forward – is immigration. Specifically, it's Canada's attractiveness to migrants in the key 20-to-44 age group, the critical demographic for household formation.
In a recent report, National Bank Financial senior economist Matthieu Arseneau noted that Canada's 20-to-44 population last year grew at its fastest rate in more than 20 years. Without immigration, this age group would have shrunk; with it, the number of 20-to-44-year-old Canadians grew by 147,000 last year, or 1.1 per cent. In the rest of the developed world, the age group shrank.
The pace of 20-to-44 immigration to Canada has accelerated significantly over the past decade or so, both in terms of raw numbers and as a percentage of total immigrants. The age group now accounts for 55 per cent of all immigrants to this country. It's no accident that Canada's housing boom has taken place during this influx of 20-to-44-year-old immigrants.
This trend is what has set Canada's housing sector apart from the rest of the developed world, and it will continue to do so. Mr. Arseneau said that while the growth rate of Canada's 20-to-44 population is expected to slow over the next decade, it will remain positive – outpacing other developed countries, most of which will see their 20-to-44 population shrink.
Certainly, there is an argument to be made that after more than a decade of building more than 200,000 new homes a year, Canada's housing market is overdue for a cooling-off period. But the base of strength in household formation, fuelled increasingly by immigration, speaks against the argument that there's a bubble waiting to burst here. The evidence agrees with the market: These numbers aren't so unsustainable after all.