Canada's housing market is getting a big helping hand from house-hungry millennials, but that will come to an end in the next several years, bringing with it an era of stagnation, the Bank of Montreal predicts.
In a new affordability analysis, BMO says the country's burgeoning millennial population will rescue the housing market from its current doldrums — but only for the next few years.
"Millennial buyers and international migrants are cushioning the decline in detached home prices in the hottest markets," said BMO senior economist Sal Guatieri.
"We expect millennials to also bolster other markets like Montreal and Ottawa, as those looking for better affordability consider options beyond Toronto and Vancouver."
A shrinking pool of homebuyers
From rising borrowing costs to tough new mortgage rules, Canada's housing market is having a tough year so far. Sales dropped to a five-year low in February, while prices sank in a majority of major cities, including Toronto.
In an interview with HuffPost Canada, Guatieri said that what's propping up the market is the population of Canadians in prime first-time home-buying age (25 to 34), which is growing at a clip of about 2 per cent per year, compared to overall population growth of 1.3 per cent in the past year.
That's putting upward pressure on the housing market, but the first-time home-buying population is expected to slow, and it's likely to start shrinking by the early 2020s.
"Then, of course, we will see fewer potential first time homebuyers in the market," Guatieri said.
All told, "we will see a much more sedate housing market over the next decade than we have seen over the past decade."
Watch: Not enough young Canadians to support high house prices, CMHC says
Guatieri likens the coming slowdown to what happened in Canada's housing market in the 1990s, when the Baby Boomer population passed its first-time home-buying age, and demand for new homes slumped.
That resulted in a decade of slowly growing or even shrinking house prices. In Toronto, house prices fell for seven straight years.
But Guatieri says this time around won't be an exact repeat of the 1990s, because things were particularly tough at that time.
It wasn't just too few first-time buyers that sank the market back then; there was also a massive spike in mortgage rates that severely reduced affordability, and there was a severe recession that saw Canada's unemployment sit above 10 per cent for years.
On top of that, "we saw a massive speculative bubble in Toronto in the late 1980s that would have burst regardless of interest rates," Guatieri noted.
Earlier on HuffPost Canada:
This time around, Canada's unlikely to see double-digit unemployment, or double-digit mortgage rates — but it is likely to see mortgage rates on the rise in the coming years.
"We won't see a downward trend in interest rates, like for most of the last decade. Mortgage rates will probably average higher levels over the next decade than the previous decade," he said.
That in turn will mean downward pressure on the housing market — not necessarily falling prices, but certainly slower price growth than Canadians have been used to, Guatieri said.
A slow year ahead
The BMO report described the current housing affordability situation as "very good," though the "Toronto and Vancouver markets remain the exception."
It noted that prices of single-family homes have softened in those two cities, though condo prices continue to rise, harming affordability. (However, the most recent data from the Toronto and Vancouver markets suggest that the condo markets there are beginning to slow as well.)
"There will be slower home price growth compared to last year, and a moderate decline in the level of home sales," BMO predicted for this year.
That's a slightly more optimistic forecast than the one the Canadian Real Estate Association put out earlier this month. It sees home sales falling 7.1 per cent this year compared to last year, and it expects the average house price to fall 2.3 per cent, to $498,100.
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