Canada's housing market has diverged in recent years: Vancouver and Toronto joined other international real estate markets such as New York, London, and Sydney, while prices in other major cities remain subdued. Vancouver and Toronto housing now costs double that of comparable homes in Ottawa, Montreal and Calgary as the two most expensive cities continue to experience the fastest increase in prices and pull further away from all other regions in the country. Let's look at the changes in buyers, housing stock, and credit creation that are behind this tale of two markets.
Table 1: Real Estate Prices in Canada 2014-2015
Stable Housing Supply
Unlike the US, Canada has no recent history of overbuilding. The ratio of housing starts to household formation is roughly in balance at 1.2 starts per formation, which has allowed Canadian construction to avoid the boom/bust cycle often associated with housing. Furthermore, stable housing supply reduces the risk to lenders and has encourages continued orderly expansion of the housing stock. Since housing supply has not driven climbing prices in Vancouver and Toronto, we focus on housing demand below.
Population Changes
Canada is a “young” country. The working population is one of the most important components of housing demand. Chart 1 compares the working age population (ages 15-64) as a percentage of total population. Canada's working age population is nearly 69% of the total population and exceeds the ratio in the US and the average for all OECD countries. Furthermore, the population aged 25-34 is growing at a rate of 2% y/y ; the age group of 30-34 is growing at even a faster rate of 2.6% y/y. These groups underpin the market of first-time buyers 1.
Chart 1: Working Age Population as a % of Total Population
Immigration accounts for about 75% of the population growth in Canada . Over half of Canada's 260,000 annual immigrants make their way to Vancouver and Toronto alone. Recent work by CIBC reveals that immigrants aged 25-45 years have dominated the estimated 770,000 non-permanent Canadian residents. Moreover, immigrants living in Canada for more than 10 years have a higher rate of home ownership than native Canadians, thereby exerting more demand pressure 2.
