Guest Post: Primer #5: The Role Of Demographics In Canada’s Coming Housing Bust

Tyler Durden's picture

Submitted by Ben Rabidoux of Financial Insights

Primer #5: The role of demographics in Canada’s coming housing bust

I’d like to reiterate that the point of these primers is to explain
the big-picture factors that have shaped my opinion on the direction of
the economy in general, and housing in particular.  So far we have
seen that deflation
and not inflation will be the dominant force over the next several
years as we have reached a point of peak credit and peak consumption in
the Western world.  Beyond that is anyone’s guess, and the inflationists
and hyperinflationists may yet be proven right.  But it won’t be in the
next few years, at least not in Canada.  We’ve seen that real estate in
Canada absolutely is in bubble territory
when the data is considered rationally and compared to widely accepted
measures of fundamental value.  We’ve seen that the two big drivers of
this bubble growth have been mass psychology
(how many times have you heard, “real estate only goes up,” despite all
the contrary evidence just south of our border) and also by the
erroneous and self-defeating policies of CMHC.

We’re once again looking at one of the macro factors that will exert
significant downward pressure on real estate prices over the next
several years:  demographics.

Let’s start by noting that Canada has a population pyramid similar in many ways to other mature economies.  The population of Canada is aging:  the median age in Canada increased from 35.2 years old in 1996 to 39.3 years old in 2008
This results in a larger share of the population getting closer to
retirement.  This is largely caused by the most notable feature on the
graph below, and the one we are particularly interested in: the bulge in
the middle of the pyramid.

I’m sure most of my readers are quite familiarized with this bulge
and with the name given to the group of people who make up this
anomaly:  The Baby Boomers.

Baby Boomers is the name given to a group of people born between 1946
and 1965.  Some simple math tells us that if you are currently between
the ages of 45 and 64, you have a lifetime membership in this club.

Right off the bat, let’s identify two important facts about the ages
of 45 and 64.  Next year the oldest Baby Boomers turn 65,  marking the
traditional end of their working years, and with it a shift away from
spending earned income to spending a retirement income that is usually
significantly less.  Also next year, the youngest Baby Boomer turns 46. 
During the typical working life, spending increases throughout the
early working years until…..age 46.  At this point spending begins to
decline while saving and debt repayment accelerates.

The effects of an aging population and this housing life-cycle can be seen in the following charts from CMHC.

Note that 59% of homeowners currently live in larger houses that
their previous house, while 32% of home purchasers in 2009 indicated
that they purchased their home because they wanted a larger home.  This
would be expected as a population ages and approaches its peak interest
in large homes.  There is also a sociological element to all of this, as
average home sizes have moved higher across all age groups over the
past several decades.  Nevertheless, I believe the era of the McMansion
is over, as you will see below.

As we noted in our first primer, because of the nature of our
fractional reserve banking system, we need a continually-expanding debt
base to service existing debt, as that debt must be repaid with
interest.  When demand for debt diminishes and when that diminishing
demand is coupled with increased savings, it causes deflationary
pressure as both the monetary aggregate and velocity of money decline. 
The impact of deflationary pressures on housing prices have been
described ad nauseum on this blog.  So we’ll leave it at that for now. 
But keep that in the back of your mind as that is the macro picture that
will be working behind the scenes here in Canada over the next several

As of early 2010, real estate provided 48% of the net worth
of Canadian households, the highest it had been in 20 years.  I would
bet that number is quite likely north of 50% today, though I can’t
prove it.  Below is a chart taken from the October 2009 Moneysense
magazine, in which they profiled the net worth of Canadian households. 
Net worth was measured as assets minus liabilities, where assets
included home equity; financial assets such as stocks, bonds, and mutual
funds; savings and bank accounts; and accrued pension benfits.  What I
want you to notice is that net worth for the 55-64 age group peaks at
roughly age 60.  The median net worth at this time is a little over
$420,000.  At closer to 65, net worth drops below 400K.

Some simple math tells us that well over 50% of Canadian households
between the ages of 55 and 64 have a net worth of less than 400K. 
Putting that fact together with the one above, it implies that there are
50% of households in Canada facing retirement with an asset allocation
of approximately $200,000 or less in home equity and $200,000 or less in
financial assets.  The picture may be even bleaker depending on the
methodology used in the Moneysense wealth test.  If they included such
non-financial depreciating ‘assets’ such as a car or household items,
the numbers could be even lower.  Here’s the point:  A massive group of
Canadians are nearing retirement and are completely unprepared for it

Let me put it another way.  In 2009, this cohort of 55 to 64 year old individuals represented a total population of over 4 million, or over 12%
of Canada’s total population.  Accounting for some one-adult
households, this represents over 2 million Canadian households.  Since
the median line represents the 50th percentile, it means that there are
over 1 million households facing retirement in the next few years and
evidently planning on having less than 200K sustain two people for the
next 20 years.  Given the extremely low interest rate environment, that
won’t throw off much, perhaps 10K per year if you’re willing to take a
bit of risk.  I don’t know what that lifestyle will buy exactly, but it
will certainly involve significantly less discretionary spending and/or
an acquired taste for Purina in a can.

Not only are they not prepared in terms of liquid financial assets,
but increasingly, people are entering retirement years with significant
debt.  Since the early 90s, the rate of insolvency among Canadians
over 55 has shot up by more than 500%.  The fact that more and more
Canadians are reaching the end of their working lives encumbered by
debt is a worrisome trend. It seems that as the boomer generation edges
into their 60s, a significant number are finding themselves
unprepared for retirement.

It should be obvious that there are many boomers expecting to free up
the equity in their home to finance their retirement.  Currently,
nearly 75% of people in the 55-64 age group own their home, meaning that
based on my crude calculations, we are looking at approximately 750,000
households faced with the option of either freeing up home equity or
significantly delaying their retirement plans.  If someone can find hard
stats that either support or refute my crude analysis, I would love to
see them.

There are several ways to free up home equity:

1)  A reverse mortgage.  In Canada, CMHC will provide these mortgages through the Canadian Home Income Plan
It will give you up to 40% of your home equity as a loan.  The
principal and accrued interest are payable either upon the death of the
mortgage holder or upon sale of the residence.  I have no doubt that
this option will become an increasingly popular way to free up home
equity.  Between 2004 and 2008 compound annual growth at Toronto-based
HomEquity Bank, Canada’s leader in reverse mortgages, was 12%.
This approach to freeing up equity should have the least impact on the
housing market.  However, the total number of homeowners opting for this
approach is still tiny; In the past 20 years, CHIP has issued
approximately $770 million in reverse mortgage loans to to only 12,500
clients.  If my math above is correct and there will be over 750,000
households that need to free up this equity, this will represent a drop
in the bucket!

2)  Sell and rent.  Given that the notion of housing being the ‘safest investment’ is heavily ingrained in the Canadian boomer psyche, I think it is a fair assumption that only a small percentage of boomers will opt for this.

3)  Downsize.  Here is where I believe the majority of boomers will
attempt to free up their equity.  The idea is simple.  Sell the huge
McMansion that now requires too much maintenance and is too large for
the needs of the near-retirees; buy a smaller home or condo.  Pocket the
difference.  Live the dream!

Several new reports from CMHC lends credence to this.  In one report,
CMHC highlighted the percentage of household undertaking major
renovations.  The results were then displayed based on the age of the

From the report:

“The most common reason provided for renovating was to update, add value or prepare to sell.
In light of these findings, it shouldn’t come as a surprise that those
aged 55 and over represent the largest share of intending home
purchasers in 2010 – which provides a window for who’s behind the recent
rise in listings.”


Note that some of the largest increases in home purchase intentions were in the 55-64 and 65+ age groups.  So what were they buying?

I believe that this absolutely is a trend that will continue.  The net effect of this will be two-fold:

1)  Price compression in the real estate market, particularly in larger, multi-floor homes.

2)  A price floor under smaller residences, particularly small
bungalows (2 bedrooms) with smaller yards.  In markets where condo
speculation and overbuilding are not rampant (ahem….Toronto!), this may
also put a floor under condo prices.

I’m confident that this boomer downsizing will be a dominant theme in
real estate for the next decade.  The great unknown, of course, is just
how many are counting on their home equity for their retirement.  How
will they react to the headlines about year-over-year declines in real
estate values?  Will they sit tight like in the Fall of 2008, expecting a
rapid bounce?  Or will they all reach the conclusion and in a wave of
panic selling try to catch the peak, spurred on by all the media talk
about a housing bubble?

As Isaac Newton famously said, “I can calculate the motion of the
heavenly bodies, but not the madness of men”.  And so it is with our
ingrained animal spirits
The great danger in having such a large group dependent on one asset
class to fund their retirements is that they may act en masse in trying
to free their equity, leading to self-feeding beggar-thy-neighbour
behaviour of price reductions amid surging inventories.

We may well see an orderly liquidation and downsizing, but it’s one
more mine in the great minefield that is the Canadian real estate
market.  Tread lightly!


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williambanzai7's picture

Do Canadians still think real estate prices can only go up?

Double down's picture

Yes, this is just a dip.  It will be back next year because we are responsible Canadians not mired in debt like those Americans.

And, yes we are retarded.

Mad Max's picture

Don't forget your took, eh!

svendthrift's picture

Look Yankee, it is spelled toque.

Double down's picture

Yes, this is just a dip.  It will be back next year because we are responsible Canadians not mired in debt like those Americans.

And, yes we are retarded.

Spitzer's picture

I agree.

These clowns had their warning in 2008. Rather then take it as a warning, it convinced them even more that housing only went up because it did bounce back.

The idea that these people cant make the correlation between falling interest rates and rising home prices is beyond me. I was renting but I knew the landlord was so far into debt and so brain dead that I wanted to get the hell out before this thing blows. My x landlord will go bankrupt, I know it. He will probably try and raise the rent to cover his ass, thats how dumb he is.

I just bought a little small house in northern Alberta to live in for now. It only cost me $38,000 because I found out that the banks will not finance it because it is too old. Imagine that, look what happens to prices when you have to pay cash, haha. I can still rent out this house for $700 a month. That is around a 20% yield.

dogbreath's picture

I just made an offer in small town alberta.  Sombody actually outbid me.  Told the realtor that I would not counter offer but they probably told the other party that I would because they upped their offer.

Spoke with a realtor yesterday.  She was remarkably on the ball because most can only sing the company song.  She said wait till spring as prices will be down by 50K.

Jessica6's picture

I know someone who bought a fixer-upper a few years ago in southern Saskatchewan for $10K and the municipality sold her the lot next door for one dollar.

Not sure how much it's gone up but it's where the 'smart money' headed before Calgary and Edmonton started to decline.

svendthrift's picture

Hubris is strong there. They watched the US housing market implode and theirs not and found an almost moral justification for it. It validated their feelings of "we're different" which heavily informs the "this time it is different" sentiment in Van/CGY/Toronto. Canadians, particularly in Van and Toronto, will drone on about how their city is world class this and that. They really don't know.

So the answer is yes. Yes, they do believe that their houses will appreciate for ever.

RockyRacoon's picture

Do we need to start building a fence at the Northern border as well?

dogbreath's picture

You don't.  I think we need to build a fence at our southern one.  

oddjob's picture

I'm sure you can print the money for that as well.

Diogenes's picture

Do Canadians still think real estate prices can only go up?"


Not me. I've been investing in real estate since 1972 and have seen the ups and downs.

In 2008 I sold most of my rental properties in fear that Canadian real estate was about to follow the US down the drain.

Since then those properties have appreciated 20%.

I've been looking for something to buy all summer but prices are too high for me and still rising.



ACjourneyman's picture

I agree bubble, there was just a report that said 60+% of people in Canada have no savings and will be in trouble if one pay cheque is delayed one week. To add to that, a house 1 1/2 hours drive to Vancouver is 500K and the ave wage is less than 50K a year. I try to get my friends to open their eyes to this but I get the deer in the headlights look.

Sudden Debt's picture

Immigrants will buy up all those houses so there's no problem.


billwilson's picture

Yes but ... the big driver on home purchases has been immigration. When 200-300,000 new folks come each year (almost 1% of the population) that provides a cushion under prices.

web bot's picture

This is the smartest and best comments made on this blog. The author misses this fact... and sounds like one of those RRSP salesmen parroting other people's ideas.

In Toronto alone, over 100,000 immigrants go through each year... and where are they going to? suburbs... Population growth is driving the housing market in Canada, not an academic bubble.

Now in the US... well that's another story.


BenRabidoux's picture

Actually I didn't miss that point at all.  Immigration into Toronto is projected to be 65K for the next several years, not 100K.


Regardless, housing starts in Canada have been running at ~175K, well exceeding net household formation, including immigration and organic household formation.

And yes, we are in a bubble.


If you'd like to debate the content of this post using widely accepted measures of fundamental value, I'd love to hear it.  Otherwise your weak anecdotes expose you for the fool you are.

web bot's picture

Go back to selling used shoes.

BenRabidoux's picture

That's about the level of intelligence I expected in your rebuttal.  You prove my point.


web bot's picture

So typical of an insecure person... the moment your post is up on Zerohedge and you are on here like some little man trying to smother everyone with your insecure comments.

You've got a way to go little man.


BenRabidoux's picture

Yeah....the guy posting using his own name rather than a pseudonym is the insecure one.  My analysis is there for you to refute.  Give 'er!

dogbreath's picture

regardless of the actual number coming in the number that is important is the number that are staying.   I see alot of new latinos and chinese in my area and they seem to be happy.  Most probably never had it so good but they are surely aware of the huge difference in the value of the goods they buy here and what they would have to pay back home.  I think many are immigrants of conveience.  Got the passport and the healthcare card.  Mom and dad work illegally.  Relative showed up and dropped a kid so it will have citizenship and the money is getting saved to be taken back or sent home where a person is comparatively rich on what is modest wealth here.  I have chinese friends who have a canadian passport and they are doing well back home.

Vampyroteuthis infernalis's picture

web bot, denial is hard to accept.

UrbanAnalyst's picture

The CMHC report linked by the author forecasts 2009 net migration to Toronto of 64,500, I believe the commentors were discussing future immigration. Supporting statistics would indeed lend credibility, perhaps also on a national basis as the nature of your content seems to not be CMA specific.

taraxias's picture

You mean those rufugees entering Canada at an alarming rate because Canadian immigration laws are too lax are the ones responsible for holding up Toronto RE prices at 10/1 earnings to price ratio and Vancouver's at 16/1?

Who would have thunk?

BenRabidoux's picture

Yes, because we only accept uber wealthy refugees.  It's a good thing those refugees are coming carrying bags of cash to purchase the average Vancouver home for a cool mil or a home in T.O for half a mil. 

taraxias's picture


Now that made me laugh.

Nice piece BTW.

svendthrift's picture

Sounds like Miami.. What with all those rich South Americans and all.

It's worth noting that there really was a flood of wealthy South Americans into Miami. They really did buy lots of high end property. They're all underwater now, but that's not all that relevant.

Suisse's picture

On the bright side you can pick up a waterfront condo on the cheap now.

Jessica6's picture

I always use Miami when trying to talk sense into people about Vancouver. There aren't that many 'rich Chinese' and the really rich ones started coming over in the late 1980s. The ugly truth is that most of the Vancouver bubble is being fuelled by locals on the scaling up treadmill all counting on that greater fool to offload their first property onto. I do think that million-dollar crackshack blog represented a tipping point though.

On top of that, underwater immigrants can bugger off back to their home countries, only losing what they put down. The Canadians with nowhere else to go will soon learn what 'full recourse' really means.

At least Miami has nice weather and gorgeous beaches.  Vancouver is only pleasant if you're moving from either the North Pole or Seattle.

Sudden Debt's picture

I reminds me of a job offer I got a few years back to go work in Norway. As a gift, they would GIVE ME a FREE 5 SLEEPING ROOM HOUSE with 90 acres of ground as a incentive!

They don't have enough young people in Norway anymore and they need people to do the work. The -500000 degree temperatures could be a reason but WHAT IF that will be the future for all western country once the old people start kicking the can? 

FranSix's picture

What's even more disturbing about the coming housing collapse in Canada is that long term mortgages are being allowed with very little or no money down, and the pension plans are all positioned to 'insure' these mortgages with what's called covered bonds.

Canada was one of the first countries to experience a melt-down with Asset-Backed Commercial Paper based on credit card debt and mortgages, but here we have the government propping up with taxpayer dollars the exact same corporate bond bubble.

And the people who are on the hook are working age couples, two-income homes with families in over their heads.  Its unreal how everyone expects that this will all work out for the better.

First, along with the housing collapse you'll get a corporate bond market collapse.  Then pensions, who are insuring it all as counterparties to the risk, can no longer guarantee any payment because its all tied up in credit default swaps.

All this is happening with a backdrop of historically low interest rates in long dated bonds.  Unreal.

Major deflation risk here.

DosZap's picture

Hate to say I TOLE YA SO........Canuckians.Saw this biatch coming over a year ago.Their fissin to get a dose of what we have.

Poor Shmucks.

FranSix's picture

What's even uglier is that retirees are fixing to profit from the onset of the collapse in housing, figuring they will yoke the young into lifelong debt servitude, but instead the entire complex will become illiquid.  Its patently insane.

CPL's picture

Yes they are...

It reminds me of given dining rooms sets. When my wife and I got married we found a modest dining room set someone as giving away a la curbside. I sanded it, polished it down , repaired it, found boston bolt sets to replaced the busted ones and refinished all the chairs. It was (is) a nice Ash set and the price was exactly where we needed it to be. Free.

4 years after being married my mum in law gave us her dining room set because she didn't like it anymore. So we took it graciously, table, chairs, hutch and buffet. We put the one I restored away in the garage to give to another couple if they needed one.

5 years later after the fact, my parents gave us their dining room set. we thanked them as the dining room set we had lived through three kids up until that point, basically it had the shit beaten out of it. So I put that set next to the old set I intended to give to someone else. So two sets in stow, one in use. Fast forward to the progressive retirement of my wife and I's parents.

So both parents retired in the span of four years between one another and when moving from a 2300 sqft two story home to a single level 850 sqft bungalow. They didn't have any problems in 2003-2006 dumping their places, it was the fact they had all this crap. Tonnes of it. Including dining room sets, dining room sets, beds, bikes, couches, tonnes of prints, boxes of knick knack crap women buy...aka shit.

I attempted to unload what I had and just had been given in the garage through craigslist and kijiji. For Free, even offered to use the truck to drop it off to any one starting out. Took forever to organize and take pictures of, meanwhile the parents are busy in Florida.

I get a couple of calls, manage to help out a couple of kids starting out (not one of them owned a car btw, these are 25 year olds, not even sure they had a license which wouldn't be that irregular). Dropped stuff off. Managed to get my own son outfitted with any stick of furiture he would even need so he doesn't move back home to live in the fridge.

To be blunt, I hardly put a dent in the mess in the garage. So two summers ago I had a 100 thousand dollar bonfire and BBQ. Just the estimates on the 80 large boxes of books, had to be a conservative estimate of around 15k. The beds I salvaged the wood and burned the rest. The Four given dining room sets went into the pyre, ash/oak/teak. Burned the prints, which are posters anyways. All oils and originals stay hanging on the walls. The shoes, suits dating back to the 70's (why do people collect/keep clothes); some was salvaged for the quilters around the area, 95% was burned.

It took two days to safely burn it all.

Now both sets of parents have rentals and a primary residence. All of the siblings have their own places and rental properties. When even both sets of parents on both sides are dead, there will be 5 properties plus the left over crap we dind't burn or give away.

I have already explained to both sets of rents that I do not want the property because managing it is a pain in the ass. So we've made arrangements for the local diocese to take them.

So to quickly summarize, see all that crap you have and the houses you own, they were only valuable to one person.

Vampyroteuthis infernalis's picture

CPL, why did you not have the Salvation Army come pick up the items and drag them away for free?

CPL's picture

I did. Salvation army is swamped with crap from a huge glut of junk from people "downsizing". They seriously don't want anything, people assume the Sally Ann is synomous with "dump".

Otherwise In the country, it just gets burned regardless at the pyre at the dump or I setup a controled burn on my property.

I obtained a license and paid some of the off duty guys firefighters to hang around and eat hot dogs/drink beer while it all burned.

If I rented a skid, hauled the skid, brought it to the dump and paid the dump levy it would have cost me $3500. For a license, beer for around 40 people and hot dogs. It cost $750. My place or the dump burns it regardless, just cost less to DIY

Rogerwilco's picture


LOL -- sounds like your garage has much in common with mine. They say when Ghandi died, he had a rice bowl, his spectacles, and a pair of sandals.

CPL's picture

The mind blowing thing is my sister is "downsizing" as well as her brats are out and gone. Since her kids rent, don't own, she's been trying to foist all her junk on to them. Since they don't want it, she's been noticing all the room in my garage. :(

It's endless.

I hope I only die with my glasses, an empty beer mug, a half finished book and a bar tab. Wife has other plans though.

VWbug's picture

i am renting in one of the most in demand areas of toronto and have owned rental properties here.

last week i was jogging and i saw something i have never seen in over 20 years here: for rent signs. Lots of them. I have never seen more than 1 for rent sign on any given street, and now i am seeing 5 or 6 on every street.

Might be a strange coincidence...but something is going on.

I never had to place an ad to rent my places here, i just tacked up a sign and then waited for the hordes to start calling and banging on my door.

Something is different now.

I also looked at some open houses for fun. One was a horrible DIY reno on a bad house on a bad street. Sloping floors, crooked windows, obvious foundation problems. About 1500 sq ft. Price? $785,000   what a joke, lol.

Don't think prices have dipped yet...but looks like they will...

gmak's picture

Why there are so many rentals now is that the condo market is soaking up young people who traditionally rented. Others are moving to owning on the rationale that it makes more sense to own than to rent at current rates. (At current rates? Are they in for a surprise in 5 years at renewal time. I also get tired of hearing that paying rent is throwing money away. So what is interest, then? :-)

It's simply supply and demand. Artificially low mortgage rates, long amortization terms, and the herd mentality are removing the demand side from the rental equation. Supply remains fixed. Look to Atlanta in 2003 - 2007 for a similar example. A traditional "full up" market, by 2003, even the best rental properties were offering major discounts and freebies to get warm bodies in vacant units.

taraxias's picture

Nice try!

The reason there are more "for rent" signs up is because people who lose their job in the "city" can no longer afford to live there due to the high cost of living. So they are abandoning ship and moving back to smaller centers where they originally came from.

And the unemployment wave is just beginning.........

gmak's picture

Could you back up your contention with data? Or is this an assumption on your part?

It appears that you are saying that those losing their jobs had moved from other cities and were renting. If people can't afford rent, then they certainly can't afford mortgages and we would probably see an increase in the foreclosure-sale market, no?

Further, according to Bloomberg, Canadian unemployment peaked  in mid-2009 and has been declining since then. I would think that these rental signs would have been popping up in 2009 (since the rise in unemployment began in early 2008).

gmak's picture

Nice chart. But what does it have to do with rental availability in Toronto, or with your contention that it is out-of-work intra-country migrants who rent that are leaving to move back home?



taraxias's picture

My "contention" is based on real life observations, not any "cut & paste" chart. 

And it's getting worse out there by the day.

In my estimation by about this time next year we'll really get to find out that a lot of Canadians been swimming naked.

gmak's picture

In essence, you are saying that you know some people who moved to TO from elsewhere, lost their jobs and had to move back.  Somehow, that can be extrapolated to include the area of TO referred to in the original post?

I guess we're done here.

VWbug's picture

gmak i think you are right.

Young people that used to rent 2 bdrm places here for $1200 to $1500 a month plus utilities are now buying 500 and 600 sq ft condos downtown, they are building them at an astonishing pace.

Also makes sense because i don't see an unusual number of for sale signs, just for rent.

I also noticed the HUGE empty lands from the distillery to the DVP (I heard it was the biggest piece of undeveloped land in any major NA city) has finally started to be developed. Foundations for condos being poured right now.

I figure they can put, i dunno, 50,000 units in there? Maybe more?

The TO downtown skyline is dramatically different than it was even 5 years ago.

Be interesting to see where it is in another 5...