In the midst of an affordability crisis, we would like to believe in an early rebound in the real estate market in the spring. But between real estate and demo…
The president and CEO of Royal LePage said in January that he believed that “the talk that the real estate market will only rebound when the Bank of Canada lowers rates misses the mark.” This recovery will begin “when consumers are convinced that the house they buy today will not be worth less tomorrow. We expect this tipping point to occur in the first quarter, ahead of the Bank of Canada’s much-anticipated policy rate easing.” Not to mention the impact of the entry on the scene of speculators and investors.
He insisted on the importance of the buyer’s feeling and confidence. “The early market recovery will be triggered by signs of stability in house prices, and we are very close to that right now. » He pointed in the direction of the strength of the job market. “People are working and unemployment is particularly low in the key demographic of 25 to 55 years old. Discretionary spending is down and savings levels are significantly higher than normal […] We believe many of those who need housing have the ability to enter the market…”
If confirmed, this outlook can only somewhat mitigate the effects of the housing affordability crisis, which is set to worsen as the demographic trap closes in on Canada. Canadian GDP has already shown a recession since the end of 2022 when measured per person! And the economists of the National Bank continued: “Our political decision-makers […] must recognize that beyond a certain number, population growth is an obstacle to our economic well-being. The fact that real GDP per capita has been at a standstill for six years is a good example. »
Real estate and demo
According to the Oxford Economics definition, a demographic trap occurs when population growth is so rapid that all available savings are used to maintain the capital-labour ratio, making it impossible to increase living standards. . Economists Stéfane Marion and Alexandra Ducharme, from the National Bank, recall that Canada’s population increased by more than 1.2 million in 2023, “an incredible figure if we consider that it follows a rebound of 825 000 in 2022 after the COVID recession. We are talking about a population growth rate of 3.2%, five times more than the OECD average.
This resulted in questions being asked about Canada’s economic and social capacity to absorb such an increase. Nowhere is this challenge more evident than in housing, where the supply gap has reached a new record, with only one housing start for every 4.2 people entering the working-age population. “To meet current demand and reduce housing cost inflation, Canada would need to double its construction capacity to approximately 700,000 starts per year, an unattainable goal. »
Benjamin Tal, deputy chief economist at CIBC World Markets, believes that housing needs are largely underestimated. “Canada needs to build 5 million more residential units in 2030, which is a far cry from the widely held estimate of 3.5 million units. The reason ? This target is based on a poor projection of population growth,” underlines the economist, while deploring that there are no credible targets, projections or plans for non-permanent residents.
Oxford estimates for its part that its new projections suggest that rapid international immigration will push the Canadian population to 42 million in 2025, a record increase of 3 million or 8% since 2022. “Which can only exert pressure on the insufficient supply of housing, especially for rental purposes, and on public infrastructure and services. »
Few immigrants purchase their property upon arrival, which fuels upward pressure on rents. This dynamic will not prevent a 5 to 10% correction in real estate prices by mid-2024, the analysis firm believes, but in the longer term, an increased population will fuel an increase in both property prices and houses and rents if the real estate supply does not expand sufficiently.
In a previous analysis, Oxford used 2012 data from Statistics Canada which, it said, remains relevant in a situation of record inaccessibility. Thus, only 8% of immigrants buy a house upon arrival. In addition, 79% of non-permanent residents opt for rental. For its part, the 2021 census indicates that 42% of immigrants living in Canada for less than five years rely on rental. After five years, this percentage drops to 18%. We can thus better understand this upward pressure which is exerted first on rents, then on house prices, exacerbated by the imbalance between supply and demand for housing.
Demographic trap
For the first time in modern history, Canada is caught in a demographic trap that has historically always been reserved for emerging economies. “Our population is growing so quickly that we do not have enough savings to stabilize our capital-labor ratio and increase GDP per capita. […] In fact, the stock of non-residential private capital per capita has been declining for seven years and is currently no higher than in 2012, while it reached a record level in the United States,” summarize the National economists.