Prospects: Does Canada Have A Housing Market Bubble? A Focus on Household Formation

Posted May 29, 2012 by CLeahey

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• Housing starts and prices are elevated in Canada, suggesting an overheated market—particularly in Toronto and Vancouver. Canada depends on domestic demand to fuel economic growth, while households borrow against home equity to finance discretionary spending. A sharp price correction could damage growth.
• In the medium term, housing starts need to match household formation. Household formation is driven by population growth, population aging, and the propensity of people to form households. Among these factors, immigration as part of population growth is likely the most important as immigration accounts for about 80% of population growth. While it is in vogue to make international speculators a scapegoat for fueling the bubble, immigrants play a positive role in supporting the housing market as well as population (and economic) growth.
• About 20% of the Canadian population is foreign-born, with different ethnic groups tending to settle in different areas. Immigrants are more likely to settle in urban areas, often living in multi-generational households to afford the high costs—as well as for cultural reasons.
• Population forecasts are used to determine the sustainable pace of housing starts. DE estimates that an average annual pace of 178,000 starts is sustainable for 2012-25. This is broadly in-line with consensus estimates of 170,000 to 180,000.
• British Columbia and Ontario do not look significantly overheated in terms of activity. Sustainability of price gains is less clear, as affordability reaches an all time low. If Canada, particularly Quebec, slows down the pace of construction, and if prices moderate or gently deflate in Vancouver and Toronto, it is likely that the housing price correction can occur without crushing the domestic demand—and therefore, economic growth.

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