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HOUSING: No signs of bubble as house prices seen doubling by 2026, says CIBC World Markets
        (AlbertaIndex, April 23) --- There is no sign of a housing bubble in Canada, says CIBC World Markets, which predicts prices are likely to double in the next 20 years.

         In its latest report entitled “Much Ado About Nothing: Canadian House Prices Not Based on Demographics Alone,” CIBC said that house prices will likely double by 2026 based on a two per cent annual inflation rate. City houses will see a higher rate of increase, said senior economist Benjamin Tal, the report’s author.
       

“Fears of a decline resulting from the downsizing and increased liquidations of houses by seniors and the falling number of first time buyers are highly exaggerated,” he said.
        The report compares population growth between two cycles of housing prices, from 1987 to 2006 and from 2007 to 2026, using Statistics Canada’s medium-growth, medium-immigration projection as a benchmark.
        Between 2007 and 2026, the projected 167,000 net decline in the number of first time buyers (Canadians between the ages of 25 and 44) is marginal, at best, Mr Tal said. Since this age group is by far the largest contributor to overall housing demand, accounting for almost 68% of all home sales, this relatively modest downturn will not significantly impact housing demand.
        The largest decline (2.5 million) is projected for the 45-to-54 age group, as many baby boomers move to the next age bracket. The impact of this change is also expected to be limited, given that the 45-to-54 age group accounts for only 12% of total housing demand.
        In fact, this moderate decline in housing demand will be partly offset by the strong increase in the 55-to-74 age group and its surprisingly high housing market activity – largely reflecting purchases of vacation and investment properties.
        “We estimate that in the coming twenty years, the Canadian housing market will face extra supply of roughly 250,000 houses,” said Tal. “While at first glance this appears to be a large number, it means an average extra supply of only 12,500 homes a year during that period.”
        Considering that total housing starts during the previous cycle averaged 180,000 per year, builders will only have to reduce new supply to just under 170,000 to completely eliminate any negative demographic influence on house prices compared to the previous cycle.
        Concerns regarding the impact of demographic forces on the Canadian housing market were first raised in the late 1980s. However, during the 20-year period from 1987 to 2007, Canada experienced a three per cent annual increase in real home prices.
        Although housing market activity in the coming 20 years will fluctuate, CIBC projects that the average real house price will mirror the performance of the past two decades.
        “Assuming a two per cent annual inflation rate, this means that house prices in Canada are expected to double by 2026,” said Tal. "This increase, of course, will not be symmetrical - with large cities  seeing even larger increases in home valuations.”



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