Demographic foundations of Canada's housing market better than advertised: CIBC World Markets

Immigrants play a bigger role in supporting the housing market than what's widely believed

TORONTO, Nov. 19, 2014 /CNW/ - Immigration is supporting Canada's housing market more than what's widely believed due to the young age demographics of newcomers and understated official population projections of non-permanent residents, finds a new report from CIBC World Markets.

"Ask any real estate developer in any of Canada's major cities about the risk of overbuilding, and the first line of defense would be immigration and its critical role in supporting demand," says Benjamin Tal, CIBC Deputy Chief Economist, who co-authored the report with Nick Exarhos. "It turns out that at least for now, this claim is more valid than widely believed."

"Not only has the rising share of young immigrants lifted demand for housing, but also, official population projections understate the actual number of non-permanent residents in the country by close to 100,000," he says.

New immigrants account for 70 per cent of the increase in Canada's population. With half of the new immigrants between the ages of 25 and 44, they represent the country's economic engine, the age demographic having the highest employment levels and the most likely to start families, the report says.

The number of Canadians aged 20-44 rose by 1.1 per cent in 2013, the fastest pace in more than two decades and almost double the Organisation of Economic Co-operation and Development's growth rate. Over the past decade, the number of Canadians in this age group has risen 75 per cent faster than in the U.S., the report notes.

"Healthier demographics are benefitting trends in household formation," says Mr. Tal.

Despite some concerns of overbuilding in the current housing boom, the ratio of housing starts to household formation is not far from its long-run average of 1.03, indicating no signs of froth, he says. "The broadly inline aggregrate trend in Canada's homebuilding means that eventual wind down in the current boom won't have to be as dramatic as feared by some," he says.

After a hot housing market in 2011 and 2012, activity in Toronto has cooled off, while the trend in Vancouver has been broadly flat for about the past four years. Only in Calgary do starts continue to show upward momentum. But because those three cities take in roughly half of all new immigrants, they are also benefiting disproportionately from the demographic lift new Canadians are providing, says Mr. Tal.

Non-permanent residents -- students, temporary workers and humanitarian refugees who are currently residing in Canada - play another key factor in providing the housing market with an extra cushion, the report says. This group also has a relatively higher propensity to rent.

The report finds a "huge gap" in the official numbers for non-permanent residents from Statistics Canada's census data and Citizen and Immigration Canada (CIC) that has resulted in household growth projections to be understated.

Mr. Tal says many researchers use the 2011 census from which to project household formation, but the census data suggests non-permanent residents in 2011 was close to 400,000 - more than 200,000 below the figures reported by CIC.

As well, another widely used measure of household formation is Canadian Mortgage and Housing Corp.'s "Long-Term Household Growth Projections  - 2013 Update," which is based on Statistics Canada's 2010 population projection. But, the report notes that back then, StatsCan underestimated the pace of the increase in the number of non-permanent residents, mainly after 2012.

This has important implications regarding the understanding of the pace of growth in household formation in Canada, Mr. Tal says.

"The gap is increasingly becoming more relevant for housing demand since a growing proportion of non-permanent residents come from workers and students with a relatively higher propensity to rent," says Mr. Tal.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/einov14.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE: CIBC World Markets