Housing’s Cassandra

By Jim McNiven

Back in the middle 1990s, a onetime federal Cabinet Minister and financial advisor, Garth Turner, wrote a book on the future. He predicted that as the Boomers grew older, they would find that the younger generation that followed after them would be too small to buy up the Boomers’ houses as these older people moved to seniors’ residences, apartments and left the suburbs for the services in the central cities. The result would be price depreciation in outlying suburbs and general price stagnation across the housing market.

If true, Turner’s prediction would mean the decline of the housing construction sector, lower banking profits due to a decline in new mortgages and general economic difficulties. In fairness, he did not extend his prediction this far, but he clearly noted that having enough housing was not good for the economy, but Canadian demographics, being what they were then and are now, made such a future probable.

In 2013, this has not happened as he predicted—yet. Turner is still looking for indications of the ‘Fall’, but he has tended to focus on the Toronto market, which in terms of this kind of doomsaying, is a laggard.

Let’s explore what is going on in the rest of Canada to bear out his idea.

There are a number of reasons for the delay. First, while the overall demographic reality is really real, there have been some changes in peoples’ behaviour as they have aged. In particular, many couples have opted to have more than one residence. Let’s ignore whether these are condos or homes or rental apartments: the point is that they control more than one housing unit and probably live in both, part-time. Some emulate the very wealthy and may have three. 

Some of this multiple housing behaviour is based on the feeling that another residence is a better store of value than stocks and bonds. Another motivation is associated with people living active and healthy lives longer. Average life expectancy may not increase that fast, but people are living better longer within their terms. They hang on to their residences longer.

Next, the average age at first marriage has increased to 30 years, a bit higher for men and a bit lower for women. There are examples of 22-30-year olds living with mom and dad after graduating from University, but generally these people tend to have their own spaces, stereotypically a downtown apartment, or at least one on a transportation route. Each.

Then, in rural Canada, many retirees want to move nearer to their child or children, as the case may be, and find it difficult to impossible to sell their houses, involuntarily ending up with two residences. Some may also opt to hang on to them in hopes the ‘family home’ will become a vacation place for their children and grandchildren. Once in the city, these older people may live in seniors’ housing or in with their kids.

Finally, as Canada keeps admitting a quarter of a million (or so) immigrants each year, these people need housing as well. Regardless of whether they or their relatives already here can afford to put them up in good housing or they have to struggle upwards on their own, they still need some of Canada’s housing stock.

At some point, however, Turner’s prediction of 20 years ago will start to come true. Today, the average Boomer is 58 and the oldest is 67. By the time Boomers start into their 70s, much divestiture of housing should take place. It gets harder to take care of that big house and lawn in the suburbs or on Lake Wobegone and, barring pressing a grown child into this service , finding other people willing to do this work will get more difficult because of the small size of the 20s age group.

Then, there are finances. The construction going on in today’s era of cheap mortgages will slow, simply because mortgages won’t be that cheap any more.  Soft demand will creep from rural farms and villages to McMansions in the suburbs. And since many of the Boomers will need to free up the equity in their residences just to live in the manner to which they are accustomed, more housing will come on the market. It should not be surprising that the banks have noted a real rise in borrowing by older people. Inadequate pensions, little savings and small public pensions (CPP+OAS today will get you about $16,000, perhaps 25% of the average family income in Canada.) mean that alternative sources of extra income have to be explored.

This is not the same thing that happened in the US. There, greed and fraud prompted lenders to give mortgages to people who could not afford their terms once the easy payment initial deal wore off. As well, others were encouraged to take out loans, essentially second mortgages, backed by the increase in value of their existing homes. When the mortgage market crashed and money for new mortgages became tight to impossible, prices for homes almost everywhere declined. Many found themselves ‘under water’ and lost their homes to foreclosure. The situation was complicated when many of these people were also laid off from their jobs.

No, we Canadians will see further price pressure on rural and far suburban markets due to a surplus of housing there caused by rural out-migration and the Boomers’ need or desire to liquidate their assets. In the cities, downtown prices should maintain themselves, but the suburbs could see varying situations depending on whether the city is growing in population. Much of this could depend on the location preferences of youths and immigrants. In any case, prices may not move upwards a lot.

Turner’s timing may be off a bit, but placing confidence in the Canadian home, or a second one, as a sure store of rising value is probably going to lead to disappointment in the not-so-distant future.