Young immigrants and boomer echo children who hold good jobs and are able to tap extraordinarily low interest rates are what’s currently behind the country’s housing boom.
More specifically, they’re what’s behind the sustained booms in Vancouver, Calgary and Toronto, big and already pricey markets that remain on fire this autumn while the rest of the country appears to be settling into what may amount to a long period of cooler activity.
That’s the take of Sal Guatieri, a senior economist at Bank of Montreal.
“While housing is static in most regions, the opposite is true for three of the nation’s four largest cities, which are benefiting from an influx of immigrants and wealth, youthful populations, strong employment and record low mortgage rates,” Guatieri said in a new note on Friday.
Guatieri breaks down his five factors driving activity in these three markets – what he calls the “Hot 3” — as the rest of the country cools.
Vancouver, Toronto and Calgary are all growing faster than the rest of Canada.
Calgary’s population is positively surging, up 4.1 per cent in 2014. Far larger Toronto is posting a gain of 1.8 per cent, a rate well above national population growth. “In fact, the combined population of the Hot 3 has risen twice as fast as other regions for the past decade,” Guatieri said.
Another trait each city shares is a younger population. Boomer children are now flocking to Toronto the way their parents did in the late 1980s, Guatieri says, while the share of 25-to-44-year-olds in Calgary “towers over other cities” at 33.8 per cent, the BMO economist said.
Toronto and Vancouver also have elevated populations in that age band compared to the national norm. Not surprisingly, this demographic trend is helping absorb high numbers of some more affordable housing types, like condos.
‘Solid’ job growth
The third characteristic common within the three centres: “solid job growth is a mainstay,” Guatieri says. Though bursts have followed lulls in recent years, job growth generally in each city has run considerably higher than the 1.1 per cent pace at the national level.
Poor affordability be damned – ultra low interest rates that have persisted for years now are helping new buyers into the market. Even with rates where they are, the average family would have to dedicate 62 per cent of income to service debt on an average bungalow in Vancouver – a figure which jumps to 75 per cent (!) if rates were to jump two percentage points. “Toronto isn’t much cheaper,” Guatieri says.
As for Calgary, it remains affordable, but “this won’t last if prices continue to leapfrog income.”
“Although reliable data are unavailable, anecdotes from builders and realtors suggest foreign wealth is a meaningful force in a number of high-end regions in Vancouver and, to a lesser extent, Toronto,” Guatieri’s note said.
“Many new residents and foreign investors pay cash, and some of the more affluent investors don’t even bother leasing their units. They are motivated by wealth diversification—and Canada ranks high on the list of countries that are politically stable. Vancouver continues to be a favoured destination of Asian immigrants.”
What does it all mean though?
When borrowing costs eventually rise, prices in Vancouver and Toronto will “face moderate price declines,” the BMO economist predicts. “Still-affordable Calgary could get off more lightly.”
A spike in rates or recession would leave Vancouver and Toronto “vulnerable to a severe correction” – “a risk that builds the longer prices outrun income.”
Calgary isn’t “immune either.” If oil continues to plummet, the region’s jobs bonanza would fade, Guatieri said.
WATCH: Portfolio manager Hilliard Macbeth is predicting in a new book a 50 per cent drop in housing prices within a year.