There has been a rising chorus of commentary on the Canadian housing market bubble of late and a number of recent articles (1, 2, 3) have infused the debate with comments from Robert Shiller of Yale. Shiller is one of the very few academic economists who does not appear to be caught by the Ivory Tower syndrome of efficient markets and rationale individuals.
I have been meaning to tie together a few strands ever since the Canadian Autoworkers made a new deal with Ford that basically locked workers into a 4 year no pay increase deal. This post is not about consumer debt, whose risk (and it is the principal economic risk in Ontario) should already be well known, but other key members of Team Ontario’s Economic concerns as they relate to the housing market.
Income growth is one of the most important components of economic growth: with high property prices and high levels of consumer debt it is also a very important platform for housing market stability.
But it is more than just weak income growth expectations in the auto sector: the risks posed by a high dollar, an increasingly competitive US labour force and the rising importance of places like Mexico in the manufacturing chain all risk weakening employment and income growth prospects in Ontario/Canada.
Manufacturing is one of the back bones of the Ontario and Quebec economies. CIBC had a good report on the impact of the high dollar on Canadian manufacturing and it is a worthwhile read – manufacturing jobs tend to be more highly paid. Note also: Canada Manufacturing: Industrial Plants Disappearing At Twice The Pace Of U.S., Study Finds
Indebted provincial government
Add in an increasingly indebted provincial government looking to restrict wage increases and employment in the government sector, and we have another factor impacting the income growth and employment foundation of Ontario. See also – A Debt Burdened Ontario: Risks and Solutions
Residential construction/Trade deficits
Ontario, and Toronto in particular, has experienced significant house prices increases and pretty much ball busting levels of residential construction. In the year to the first quarter of 2012, residential construction was some 34% of GDP growth, while the sector itself represented 7.7% of GDP.
Exports have historically played an important part in Ontario’s economy, yet they continue to lag imports: Exports have fallen off a cliff between Q1 2000, when they represented 72.5% of real GDP to Q1 2012 when they represented 59%. Imports have risen from 63% to 64.3% of real GDP. This weakness reflects a) a greater dependence on consumer demand and b) a much weaker manufacturing and export sector.
Much has also been said of the oft quoted benefit of the 1xx,000 or so new immigrants (for the housing market) coming to Ontario each year, but little is said of the overall demographic profile.
According to a Globe and Mail report recent immigrants (2000 to 2004) earned about 60% of medium wage. Additionally, the number who are entering higher paid regulated occupations also appears to be falling:
The proportion of immigrants intending to work in a regulated profession continue to decline in Ontario. In 2004 12.1% intended to work in a regulated profession, but by 2008 that figure was down to 8.3%.
Also it is more likely that new immigrants will be living in multiple households: the majority of new immigrants are from the Philipines, India and China. The following figure (taken from the Stats Can 2011 census) shows the percentage change in the number of private households and by household type in Canada from 2001 to 2006 to 2006 to 2011
Also,27% of new immigrants are under 15 with a further 23% between the ages of 15 to 24. In 2010 58.8% (69491) of new Ontario immigrants were in the economic class, but of these only some 26,798 were prinicpal applicants (the rest were spouses and children). Many of the economic class were in lower paid occupations like caregivers (4,169). It is hard to see an economic force driving property prices and property demand, initially, from new immigrants as a whole.
The organic demographic growth rate is much lower than the population growth rate of between 1% and 1.20% over the last few years. In fact the organic population growth rate (net births and deaths) has been declining to 0.375% in 2011 in Ontario from 0.486% over the 1996 to 2001 period. Ontario is stuck without new immigrants and is overly dependent on their quality to grow the economy.
New housing stats relative to population growth
From 2002 to Q3 2012, there was some 780,915 new housing starts, relative to population growth of 1.558m – population growth 2002 to 2011 was some 1.477m, in the first quarter 2012 some 27,000, guesstimate of population growth to Q3 2012 = 3 x 27,000. This is equivalent to a household size of 1.995, when average household size for the GTA is some 2.8.
If we were to assume an average household size for all new units of 2.81, population growth would be some 628,562 short. If new immigrant household size has an average of greater than 2.8, then the estimated population shortfall is higher.
The extent to which there is a housing shortage or surplus depends on a greater number of factors and I am just pointing out that the logic that immigration supports house prices and condo development is not as robust or as clear as it might seem. Average household size does decline the closer to the downtown core you get so we really need more data on the distribution of new immigrants to get an exact fix. Note also: http://env-blogs.uwaterloo.ca/atlas/?page_id=106
An interesting fact is that the population of the old city of Toronto has finally regained its 1972 peak: “The area of the old City of Toronto, before 1997′s amalgamation, has finally seen its population increase above its previous high—in 1971. Like many North American cities, the ’70s weren’t kind to the downtown core of what was then Metro Toronto. A combination of economic and demographic factors (jobs leaving for lower-tax suburbs; baby boomers starting new families in bigger suburban houses; shrinking family sizes) caused a large drop in the population of Old Toronto.”
I am a touch concerned when I hear positive views on highly valued assets, especially when it is clear that housing like any other asset class is prone to valuation and affordability risks. The economic environment certainly does not support high valuations going forward and immigration demographics while supporting population growth lacks the qualitative financial dimensions that might provide support to some of the demand driven arguments. The one sided nature of economic growth in the province and the fiscal position should also be warning signs.