Demographics and the housing bubble
In one of the primers, I outlined the issues I see with Canadian demographics and our current housing market. My position remains that many near-retirees are not adequately prepared for retirement when one looks at their liquid investment assets such as savings, stocks, bonds, and mutual funds. The largest holding of the typical Canadian household remains their home at 48% of the average net worth. There is no doubt that there is a segment of the population expecting to downsize their home and use the proceeds to at least partially fund their retirement. There is an additional segment that will choose to downsize as a lifestyle choice rather than monetary considerations. The million dollar question is just how how large a segment this represents.
With 1000 boomers turning 65 every day in Canada, it need not be a huge percentage to significantly affect supply. With sales remaining weak across most of the country, a trend I expect will continue, added inventory will only put downward pressure on prices.
This reality is starting to sink in. Today the Globe and Mail ran an interesting article:
“We all know about the demographic monster the boomers represent – a generation that far exceeds, size-wise, anything coming up behind it. Those wanting to enter the market in the coming years may not have the money to buy single-family detached homes, either. Thus the dilemma: Who will boomers sell to when they’re ready to move into some swank condo downtown or on a golf course somewhere?”
“It’s a question that Dowell Myers of the University of Southern California has pondered, too. He is among a number of urban planners and demographers predicting another housing crash, this one caused by the massive sell-off by boomers wanting to downsize.”
“An oversupply of homes generally means prices fall. But as home values decline, so will home equity, diminishing retirement savings in the process. Home equity is the single largest component of net wealth for most people.”
Tsur Somerville, an associate professor at the University of British Columbia’s Centre for Urban Economics and Real Estate, isn’t as pessimistic….“I know it’s one of those theories where the numbers add up and the underlying fundamentals are correct, but I think in Canada, at least, it’s too early to say how it’s going to play out. I think immigration is the key.”
Certainly immigration will help alleviate the problem, but despite the current pace of immigration into Canada (4.8 per 1000) population growth is still an anemic 1.3% per annum, while our overall population continues to age. I believe that two themes in Canadian real estate will play out over the next decade:
1) Deflation will pull at all house prices. Real house price growth will be negative for the better part of the next decade as savings rates normalize, debts are paid down, and real estate descends from it’s lofty heights.
2) The era of the McMansion is over. In addition to widespread monetary deflation that will weigh on all types of real estate, there will be considerable price compression in the upper end of the market. In smaller retirement communities where condo development has not run rampant, expect small homes and condos to hold their value better than larger homes.
Rosenber loves Canada
In today’s daily economic commentary by Dave Rosenberg, he outlines the case for Canada’s relative economic strength when compared to our southern neighbours. Rosy also outlines why he feels the TSX presents better long-term value than the US exchanges. It’s well worth the read.
I have a lot of respect for Rosenberg and I don’t disagree with the long-term economic outperformance of Canada vs. the US, though I suspect our economy will underperform theirs in the short to medium term. I also agree that the TSX in general presents a better buy than the US indices. All that being said, I’m not nearly as comfortable as Rosenberg is on the following:
1) The possibility of a hard landing in China at some point in the near future. This would put strong downward pressure on commodity prices, exports, and the commodity laden TSX. Rosenberg acknowledges this risk in the first paragraph, though he doesn’t weigh in on the likelihood of such an event.
2) The realignment of Canadian house prices with long term measures of fundamental value. By all accounts, we are well above historic trend lines when measured in price/income, price/rent, and affordability. As I so often warn on this blog, a slowdown in house prices would crimp consumer spending and clamp down on HELOC growth. At 65% of GDP, such a slowdown is hard to absorb and still experience real economic growth.
3) Consumer debt levels, which Rosenberg notes are ”clearly problematic, but for now, completely serviceable”. Should the strong rebound in economic growth materialize, the accompanying rise in interest rates would reveal just how serviceable debts really are. Without an impressive rise in income levels and a stabilizing of debt levels, I see a catch 22 here.
All that being said, it’s important to remember that the economy and the stock market are not entirely joined at the hip. While I see economic storms on the horizon, I’m still happy to add to my stock portfolio, particularly when I see gems that meet my investment criteria.