Jason Heath | Financial Post Oct 30, 2012
What’s going to happen to home prices in Canada? Despite all of the analyses and hypotheses in the media, the answer may not be based on historical real estate prices, interest rates or ratios. The answers may lie, to a great extent, in our demographics.
The typical Baby Boomer is likely to sell the 3,000 square foot, 4-bedroom home they raised their family in and instead opt for a 1,500 square foot condo before long. They don’t need the space and they don’t want the stairs. Besides that, they may need the money to fund their retirement. When they’re no longer able to care for themselves, the next downsize may be a 500 square foot nursing home. And the final downsize requires considerably less square footage.
This pattern is likely to put a damper on real estate prices, in general, in the coming decades. It’s also one reason supply, demand and prices for condos in this country may continue to rise
According to Statistics Canada, the Baby Boom lasted 20 years in Canada. During that time, more than 8.2 million babies were born, an average of close to 412,000 a year. In comparison, the number of births in 2008, when the population was twice as large as during the baby boom, was only 377,886.”
Canadian consumer spending represents about 58% of the Canadian economy as measured by Gross Domestic Product (GDP). Shelter, principal accommodation, household operation and household furnishing represent about 58% of consumer spending. This means expenditures related to real estate ownership and maintenance represent about 1/3 of Canadian GDP.
What this means is that the pressure of Baby Boomer downsizing could be an impediment to home prices, economic growth and inflation.
Canada’s annual inflation rate came in at 1.2% for September, below analyst expectations of 1.3%. Core inflation, which excludes the most volatile components of inflation, was 1.3%, compared to an expected 1.5% and down from 1.6% in August. The Bank of Canada maintains a target of 2% for core inflation. The Bank generally increases interest rates in order to keep inflation from rising too much, too quickly. Inflation does not appear to be an issue in Canada at this time, so we continue to have low interest rates.
Deflation — the opposite of inflation — occurs when inflation falls below 0% and prices generally decline. The problem with deflation is that money becomes more valuable the longer you hold it, which tends to become a self-fulfilling prophecy, as spending slows down and prices decline further. Why buy something for $100 today if it will only cost $99 tomorrow? It’s never been much of an issue in Canada, though Japan has fought a battle with it for the past two decades.
Ben Bernanke, governor of the U.S. Federal Reserve, made a famous speech in 2002 in which he said that deflation could be prevented or reversed by dropping money from a helicopter — a speech that earned him the nickname “Helicopter Ben.”
“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Ten years later, Bernanke is putting his money where his mouth is, having recently embarked on a third round of quantitative easing to stimulate the U.S. economy. This stimulus is arguably focused most specifically on putting a floor on U.S. real estate prices.
Despite central bank intervention to help encourage economic growth, according to Harry Dent, author of The Great Crash Ahead, demographics are forecasting deflation.
Dent writes: “When the average kid is born, the average parent is 28. They buy their first home when they’re 31 . . . after they had those kids. When the kids age into nasty teenagers, the parents buy a bigger house so they can have space. They do this between the ages of 37 and 42. Their mortgage debt peaks at age 41. And . . . their spending peaks at around 46.”
Baby Boomers were born between 1946 and 1964, meaning their parents turned 46 in the 70s and 80s. Perhaps not surprisingly, these were the years during which Canadian inflation more than tripled from the post-war average of 2% to closer to 6% — peaking in 1975 at nearly 15%. High inflation during the 70s and 80s was not a Canadian phenomenon, but then again, neither was the Baby Boom.
The Baby Boom peaked in 1961. The thing about the magic number 46 is that if you add it to 1961, you get 2007. It’s not that Baby Boomers, the homes they live in and their spending habits caused the financial crises of the last five years — sub-prime mortgage lending in the U.S. and excessive government deficits abroad have played their part. But it’s interesting, nonetheless.
There are about 9.6 million Canadian Baby Boomers. They represent more than one-quarter of our population. Their spending habits will greatly influence future real estate prices and make the Bank of Canada’s goal of stable, predictable inflation difficult. At least we have Helicopter Ben patrolling our southern borders — for better or for worse.