The following is a guest column by Ben Myers, Senior Vice President Market Research and Analytics at Fortress Real Developments. Fortress Real Developments partners with builders and developers across Canada and Ben assists in evaluating the market and projects that Fortress engages in.
I’m reading an interesting book right now called The Next 100 Years, A Forecast for the 21st Century. The author, George Friedman, believes a major disruptive force will be a population bust. Declining birth rates and a major flattening out of the average lifespan will curb population growth and potentially lead to population declines. It will be interesting to see if something similar happens in Canada and how it will impact the housing market.
Based on recent data from Statistics Canada, a low-growth projection calls for population in Canada to reach about 40 million in 2050, the high-growth forecast calls for population to reach approximately 55 million. For someone in the business of real estate finance and development, that is a pretty wide range. The low-growth scenario would represent an annual increase of 115,000 people a year, the high-growth would be 525,000 a year.
For comparison purposes, Statistics Canada estimated the population in this country to be 35.7 million as of the Q2-2015, an increase of 333,421 people over the past 12 months, nearly the midpoint of the annual change in the low and high-growth scenarios presented above.
What does all this mean for the housing market and prospective buyers worried about oversupply? If you ignore vacancies and second/vacation homes, the average household size consists of 2.3 people in Canada (based on total population divided by total dwellings), so a population increase of 333,421 people would require approximately 145,000 new dwellings to satisfy that new demand. For my latest Market Manuscript, a 60-page research report on the Canadian housing market, I pulled together 10 forecasts for housing starts in Canada for 2015, the average being 182,000 starts. Let’s do the math, 182,000 is a lot bigger than 145,000 – so maybe we are overbuilding?
There are a couple things to consider. Canada has built approximately 189,000 new housing units annually on average for 50 years. Lower birth rates, people staying single longer, higher divorce rates and a higher share of new housing supply being high-rise condos has resulted in a declining average household sizes. Developers don’t usually build a lot of houses “on spec” either, leading me to believe the gap between demand for new homes and their supply will never get too out of hand unless we see a surge in rental apartment activity – additionally, my survey of residential builders and developers conducted for the Market Manuscript asked what percentage of the units they start construction on this year would be unsold, and 55 per cent of the respondents indicated it would be less than 10 per cent. How do these factors and realities play into the supply-demand equilibrium in this country?
I figured I’d first take a look at population data, CMHC projections, and BuzzBuzzHome numbers for 2015, to see how they all matched up. The chart below shows the change in population between the second quarters in 2015 and 2014, and projections of housing demand based on the average household size in that province from the 2011 Census. There are two measures of supply, forecasted 2015 housing starts from CMHC, and projected housing completions from BuzzBuzzHome. I used 75% of the BuzzBuzzHome completion projections based on the fact that many developers use a “best-case scenario” occupancy date for their condominium projects, and the difficulty forecasting how many completions there will be in large low-rise housing developments (much more difficult than high-rise obviously).
Based on both the CMHC and BuzzBuzzHome data, Ontario and BC are building more new housing units than 2015 population would suggest they needs. Both the CMHC and BuzzBuzzHome data suggest Manitoba is underbuilding. Alberta is right between the two forecasts, suggesting they are currently building the appropriate amount of housing.
If the two provinces with the highest price appreciation are building a little too much housing, is that a bad thing? It might help calm those red-hot markets and improve affordability.
Undersupply in Manitoba might present a good opportunity to buy and take advantage of future price appreciation.
In conclusion, it is very hard to tell if we are building the right number of houses in Canada. We need to consider immigration levels, how many children people are having, how long boomers are going to stay in their big empty houses or Millennials in their downtown condos, what level of vacancy is acceptable for landlords, the level of vacation and cottage home demand, recessionary impacts on buying decisions, how long young adults live with their parents, fluctuating student housing demand, and the accuracy of the data being collected.
This debate is a little more complicated than simply looking out the window of your car when you drive around. There is no simple answer. What do you think, are we overbuilding or underbuilding?
Fortress Real Developments partners with builders and developers across Canada, and Ben assists in evaluating the markets overall and projects that Fortress engages in (Twitter: @benmyers29). Follow his blog posts and commentary on the Canadian Housing Market at www.fortressrealdevelopments.com/news or for more info on real estate investing, go to www.fortressrealcapital.com.
