Primer #5: The role of demographics in Canada’s coming housing bust

Hello again

I’d like to reiterate that the point of these primers is to explain the big-picture factors that have shaped my opinion on the direction of the economy in general, and housing in particular.  So far we have seen that deflation and not inflation will be the dominant force over the next several years as we have reached a point of peak credit and peak consumption in the Western world.  Beyond that is anyone’s guess, and the inflationists and hyperinflationists may yet be proven right.  But it won’t be in the next few years, at least not in Canada.  We’ve seen that real estate in Canada absolutely is in bubble territory when the data is considered rationally and compared to widely accepted measures of fundamental value.  We’ve seen that the two big drivers of this bubble growth have been mass psychology (how many times have you heard, “real estate only goes up,” despite all the contrary evidence just south of our border) and also by the erroneous and self-defeating policies of CMHC.

We’re once again looking at one of the macro factors that will exert significant downward pressure on real estate prices over the next several years:  demographics.

Let’s start by noting that Canada has a population pyramid similar in many ways to other mature economies.  The population of Canada is aging:  the median age in Canada increased from 35.2 years old in 1996 to 39.3 years old in 2008.  This results in a larger share of the population getting closer to retirement.  This is largely caused by the most notable feature on the graph below, and the one we are particularly interested in: the bulge in the middle of the pyramid.

I’m sure most of my readers are quite familiarized with this bulge and with the name given to the group of people who make up this anomaly:  The Baby Boomers.

Baby Boomers is the name given to a group of people born between 1946 and 1965.  Some simple math tells us that if you are currently between the ages of 45 and 64, you have a lifetime membership in this club.

Right off the bat, let’s identify two important facts about the ages of 45 and 64.  Next year the oldest Baby Boomers turn 65,  marking the traditional end of their working years, and with it a shift away from spending earned income to spending a retirement income that is usually significantly less.  Also next year, the youngest Baby Boomer turns 46.  During the typical working life, spending increases throughout the early working years until…..age 46.  At this point spending begins to decline while saving and debt repayment accelerates.

The effects of an aging population and this housing life-cycle can be seen in the following charts from CMHC.

Note that 59% of homeowners currently live in larger houses that their previous house, while 32% of home purchasers in 2009 indicated that they purchased their home because they wanted a larger home.  This would be expected as a population ages and approaches its peak interest in large homes.  There is also a sociological element to all of this, as average home sizes have moved higher across all age groups over the past several decades.  Nevertheless, I believe the era of the McMansion is over, as you will see below.

As we noted in our first primer, because of the nature of our fractional reserve banking system, we need a continually-expanding debt base to service existing debt, as that debt must be repaid with interest.  When demand for debt diminishes and when that diminishing demand is coupled with increased savings, it causes deflationary pressure as both the monetary aggregate and velocity of money decline.  The impact of deflationary pressures on housing prices have been described ad nauseum on this blog.  So we’ll leave it at that for now.  But keep that in the back of your mind as that is the macro picture that will be working behind the scenes here in Canada over the next several years.

As of early 2010, real estate provided 48% of the net worth of Canadian households, the highest it had been in 20 years.  I would bet that number is quite likely north of 50% today, though I can’t prove it.  Below is a chart taken from the October 2009 Moneysense magazine, in which they profiled the net worth of Canadian households.  Net worth was measured as assets minus liabilities, where assets included home equity; financial assets such as stocks, bonds, and mutual funds; savings and bank accounts; and accrued pension benfits.  What I want you to notice is that net worth for the 55-64 age group peaks at roughly age 60.  The median net worth at this time is a little over $420,000.  At closer to 65, net worth drops below 400K.

Some simple math tells us that well over 50% of Canadian households between the ages of 55 and 64 have a net worth of less than 400K.  Putting that fact together with the one above, it implies that there are 50% of households in Canada facing retirement with an asset allocation of approximately $200,000 or less in home equity and $200,000 or less in financial assets.  The picture may be even bleaker depending on the methodology used in the Moneysense wealth test.  If they included such non-financial depreciating ‘assets’ such as a car or household items, the numbers could be even lower.  Here’s the point:  A massive group of Canadians are nearing retirement and are completely unprepared for it financially.

Let me put it another way.  In 2009, this cohort of 55 to 64 year old individuals represented a total population of over 4 million, or over 12% of Canada’s total population.  Accounting for some one-adult households, this represents over 2 million Canadian households.  Since the median line represents the 50th percentile, it means that there are over 1 million households facing retirement in the next few years and evidently planning on having less than 200K sustain two people for the next 20 years.  Given the extremely low interest rate environment, that won’t throw off much, perhaps 10K per year if you’re willing to take a bit of risk.  I don’t know what that lifestyle will buy exactly, but it will certainly involve significantly less discretionary spending and/or an acquired taste for Purina in a can.

Not only are they not prepared in terms of liquid financial assets, but increasingly, people are entering retirement years with significant debt.  Since the early 90s, the rate of insolvency among Canadians over 55 has shot up by more than 500%.  The fact that more and more Canadians are reaching the end of their working lives encumbered by debt is a worrisome trend. It seems that as the boomer generation edges into their 60s, a significant number are finding themselves unprepared for retirement.

It should be obvious that there are many boomers expecting to free up the equity in their home to finance their retirement.  Currently, nearly 75% of people in the 55-64 age group own their home, meaning that based on my crude calculations, we are looking at approximately 750,000 households faced with the option of either freeing up home equity or significantly delaying their retirement plans.  If someone can find hard stats that either support or refute my crude analysis, I would love to see them.

There are several ways to free up home equity:

1)  A reverse mortgage.  In Canada, CMHC will provide these mortgages through the Canadian Home Income Plan.  It will give you up to 40% of your home equity as a loan.  The principal and accrued interest are payable either upon the death of the mortgage holder or upon sale of the residence.  I have no doubt that this option will become an increasingly popular way to free up home equity.  Between 2004 and 2008 compound annual growth at Toronto-based HomEquity Bank, Canada’s leader in reverse mortgages, was 12%. This approach to freeing up equity should have the least impact on the housing market.  However, the total number of homeowners opting for this approach is still tiny; In the past 20 years, CHIP has issued approximately $770 million in reverse mortgage loans to to only 12,500 clients.  If my math above is correct and there will be over 750,000 households that need to free up this equity, this will represent a drop in the bucket!

2)  Sell and rent.  Given that the notion of housing being the ‘safest investment’ is heavily ingrained in the Canadian boomer psyche, I think it is a fair assumption that only a small percentage of boomers will opt for this.

3)  Downsize.  Here is where I believe the majority of boomers will attempt to free up their equity.  The idea is simple.  Sell the huge McMansion that now requires too much maintenance and is too large for the needs of the near-retirees; buy a smaller home or condo.  Pocket the difference.  Live the dream!

Several new reports from CMHC lends credence to this.  In one report, CMHC highlighted the percentage of household undertaking major renovations.  The results were then displayed based on the age of the households.

From the report:

“The most common reason provided for renovating was to update, add value or prepare to sell. In light of these findings, it shouldn’t come as a surprise that those aged 55 and over represent the largest share of intending home purchasers in 2010 – which provides a window for who’s behind the recent rise in listings.”


Note that some of the largest increases in home purchase intentions were in the 55-64 and 65+ age groups.  So what were they buying?

I believe that this absolutely is a trend that will continue.  The net effect of this will be two-fold:

1)  Price compression in the real estate market, particularly in larger, multi-floor homes.

2)  A price floor under smaller residences, particularly small bungalows (2 bedrooms) with smaller yards.  In markets where condo speculation and overbuilding are not rampant (ahem….Toronto!), this may also put a floor under condo prices.

I’m confident that this boomer downsizing will be a dominant theme in real estate for the next decade.  The great unknown, of course, is just how many are counting on their home equity for their retirement.  How will they react to the headlines about year-over-year declines in real estate values?  Will they sit tight like in the Fall of 2008, expecting a rapid bounce?  Or will they all reach the conclusion and in a wave of panic selling try to catch the peak, spurred on by all the media talk about a housing bubble?

As Isaac Newton famously said, “I can calculate the motion of the heavenly bodies, but not the madness of men”.  And so it is with our ingrained animal spirits.  The great danger in having such a large group dependent on one asset class to fund their retirements is that they may act en masse in trying to free their equity, leading to self-feeding beggar-thy-neighbour behaviour of price reductions amid surging inventories.

We may well see an orderly liquidation and downsizing, but it’s one more mine in the great minefield that is the Canadian real estate market.  Tread lightly!


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19 Responses to Primer #5: The role of demographics in Canada’s coming housing bust

  1. Ron Stockburn says:

    Very good article. Well written and easy to understand.

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  5. UrbanAnalyst says:

    As noted on Zero Hedge:

    Could the author please comment on the mitigating impact of defined contribution pensions on the following statement:

    “Since the median line represents the 50th percentile, it means that there are over 1 million households facing retirement in the next few years and evidently planning on having less than 200K sustain two people for the next 20 years. Given the extremely low interest rate environment, that won’t throw off much, perhaps 10k per year if you’re willing to take a bit of risk”

    This appears to be, among others, an instance of illustrating a substantial gap in the logic of article’s underlying premise. While StatsCan does include EPP assets in their Net Worth calculations (thereby included in the very crude $200k figure arrived at by the author), these are actuarial calculations done on a conservative Termination Value basis (excludes benefits from remaining high-income years to retirement accrued).

    Furthermore, despite the conservative inclusion methodology it appears as though these assets represent a material component of net worth at a national level on a median basis (Please note figures are from 2005 –, and will intuitively represent a substantial source of income for most retirees, undercutting the need to draw down home equity. Treating these assets as fungible portfolio assets that can be invested in markets at all is an error in logic, as these balance sheet assets payout according to complex benefits schedules rather than market forces.

    I look forward to your commentary and supporting materials that indicate to what extent income provided by DC retirement funds will be insufficient to fund future needs.


  6. Hi UrbanAnalyst

    First of all, there are only 38% of households with pension assets to begin with, so I’m not sure what you mean by “these assets represent a material component of net worth at a national level on a median basis”. I don’t buy that at all. I would agree that it would represent a material component of the average net worth, explaining the significant difference between the two lines. Ultimately there are less than 40% of households counting on private pension income. My analysis deals with the bottom 50%. You could halve my crude estimates of the number of households expecting to tap home equity and it doesn’t change the ultimate point of the post.

    • UrbanAnalyst says:

      I would be fascinated to know the source for your figures above, as they stand in direct contrast to this 2007 report from the government agency HRSDC ( indicating that 96% of seniors received Old Age Security, 90% received CPP/QPP, and 59% have private pensions. How do you come up with 38% of households having private pension assets versus this study with 96% of all seniors (or 59% if we’re staying on the private pension basis highlighted in the Statscan data previously)?

      Additionally, while I am certain you noticed this already, the Statscan median balance sheet referenced previously excluded public retirement funds from their median asset calculations (i.e. OAS/CPP/QPP), as noted. You must also then agree that pension assets on the median national balance sheet are far greater than even the material 30% figure for conservatively estimated private pensions.

      But more importantly, my original question, how do you think the income from pension benefits (both public and private, but in DC form) offset the need for seniors to literally drawdown their equity from their homes?

      Given this demographic trend and income requirement is the underpinnings of your thesis I strongly recommend you deepen and support your analysis to give your premise credibility. Simply dismissing the benefits from seniors income programs implemented by public institutions as irrelevant hardly lends your notions stable footing.

      • “How do you come up with 38% of households having private pension assets ”

        The link you provided clearly indicates that 67% of seniors had income from private pensions AND/OR RRSPs. That jives completely with the numbers used in the post.

        “96% of seniors received Old Age Security, 90% received CPP/QPP”

        OAS pays an average of $490 per month

        CPP pays an average of $500 per month.

        I’m not sure this will suffice to sustain the lifestyle many retirees enjoyed during their working years.

        The blog posting has two main conclusions:
        1) The boomer demographic will be spending less going forward. Demographics are working against our consumer spending-driven economy.

        2) I believe (both through my own personal experiences and through my research) that a number of boomers are ill-prepared for retirement and are counting on home equity to at least partly fund their retirement. How they will do so without adversely affecting the housing market, and larger homes in particular, remains to be seen.

        If you’d like to refute these assertions, I’d be happy to post a guest article. Feel free to email it to me.


  7. UrbanAnalyst says:

    Under more careful reading I think you will find that the link you provided in defense of a figure of “there are only 38% of households with pension assets” relates to the percentage of ‘paid workers’ that have ‘registered pension plans’. The implications of this misinterpretation are frankly staggering, to which I hope you agree. Beyond this misrepresentation of facts, an examination of the survey methodology ( would yield the crucial insight that ‘registered pension plans’ include only those plans sponsored by private employers or unions (who are registered as such with the CRA for tax purposes). Excluding, similar to prior Statscan total assets on a national level, median basis, public pension plan assets accrued.

    Stating truisms such as retired workers will be contributing less to consumer-spending as a percent of GDP, accompanied by anecdotal support and mismatched, loosely researched data, hardly seems worthy of a missive at all in retrospect.

    I would be intrigued to see your claims researched with a keen eye to quality and depth of understanding. Firstly, how the transition from employer earnings to retirement benefits impacts actor decision-making with regard to real estate assets, and then in a following paper, to what degree this will impact national real estate dynamics. While the first dissertation would of course need to examine the characteristics of both public and generic private pension plan benefits, comprehensive net worth analysis, both set against retiree spending demands and trends. The second disseration would need to fix number of independent variables, and should of course address net migration forecasts, household headship rates in conjunction with emerging generational preferences, and local supply and demand conditions.

    When I see those papers as described I will be intrigued to listen, but I am afraid from the degree of quality and professionalism presented so far it simply is not worth my time to read or discuss materials on this site further. Remember, quantity over quality is the fastest way to lose readers, but the reverse is true as well.

    Best of luck.

  8. “Under more careful reading I think you will find that the link you provided in defense of a figure of “there are only 38% of households with pension assets”

    From the cited document:
    “Note to readers
    Registered pension plans (RPPs) are established by employers or unions for employees. These data come from the Pension Plans in Canada Survey at January 1, 2007, which provides information on terms and conditions, membership and contributions. Membership is defined as active members of the pension plan currently making contributions to the pension plan or for whom contributions are being made.
    There are two main types of RPPs: defined benefit plans and defined contribution plans. A defined benefit plan is an RPP that defines the benefits to be paid according to a formula stipulated in the plan text. The employer’s contributions are not predetermined, but are a function of the cost of providing the promised pension.”

    So is your sticking point with the fact that 38% of employees have pension plans. Do you assume that some may perhaps mysteriously receive pension benefits in retirement that they have not paid for? I’m not sure of the issue here.

    “The implications of this misinterpretation are frankly staggering, to which I hope you agree.”

    I’m a simple man. You’re going to have to spell this one out for me.

    “Stating truisms such as retired workers will be contributing less to consumer-spending … hardly seems worthy of a missive at all in retrospect.”

    Come on! Seriously?

    “When I see those papers as described I will be intrigued to listen, but I am afraid from the degree of quality and professionalism presented so far it simply is not worth my time to read or discuss materials on this site further.”

    Understandable. Nice chatting.

    • Jeffrey Thomas Marlin says:

      I don’t understand how this article made it to Zerohedge? Where is the quality control? I guess we better start looking at other shop class teachers Geocities homepages. I’m sure there is lot’s more gold to find in there.

      I’m starting to hate Zerohedge more each day. Just scraping the bottom to find anyone with something negative to say.

      *I will note I have nothing against the author. I’m just startled that Zerohedge would post these articles. Might as well just go straight to the source and post articles from Then Garth Turner can sell a few more books.

  9. jimboalogo says:

    Author, why not then just go as far as to explain that the entire economic engine is going to stall and we are going to all freefall into our own demise. The best advice you could give to all, is to pay down your mortgage asap and eliminate unnecessary debt. We all need a place to live, whether you rent or own. Renting is like throwing money away on a principal residence. Freeing up payments to the bank on a mortgage gives you a free ticket to manage and spend on the necessities old timers require; and should be done so sparingly.As you mentioned many over 55 are mortgage free;why encourage borrowing at that age?It’s senseless , unless its life or death. Babyboomers are maturing slowly into retirement, the next generation of consumers will drive the vehicle, bumps in the road and all.The world will not stop spinning once babyboomers start to retire.In fact the youngest boomers are 20 years away from that!! So you are many years off.The funny thing is author, you are about the 50th person to warn me of the coming dark days in the past 20 years.Never fear, after all its only money.Regards

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