Looking around metro Vancouver, construction cranes and new high-rises are in every direction as far as the eye can see. From the rosy headlines and sale prices, it might be easy to conclude that Canada’s in a huge growth phase, rather than a rapidly inflating bubble. Look beneath the surface, however, and things stand out that look a lot more like a bubble than a boom.
The demographics of Canada simply do not support the level of growth seen. As The Globe and Mail reported:
In reality, Canada’s working-age population (15-64 year-olds) is growing at the slowest pace on record, a paltry 0.4 per cent or just one third of the long-term average. In 2010, Canada added 240,000 people to the working-age population. Today that number has dwindled to just 90,000. In provinces like Quebec, that number is actually declining.
An outside observer might note that against a backdrop of an unprecedented decline in population growth, the level of residential construction activity should slow sharply. Curiously, that hasn’t happened.
When too many houses are built for too few people, a bubble inevitably results. When the number of new houses exceeds the number of new workers, the bubble gets bigger.
Fast forward to today. Housing starts in June hit their highest level in 10 months at just under 203,000 on a seasonally adjusted basis. That level of construction means we’re currently building over two new houses for every person we’re adding to the working-age population. … You’ll note that in the late 1980s, we were building 1.5 new homes for every person added to this group. It’s clear in hindsight that there was significant overbuilding during that time period, particularly in Ontario where house prices subsequently fell 25 per cent between 1989 and 1993 as supply overwhelmed demand.
This isn’t simply an issue of fixing economic demand. Canada is officially in a recession, so counting on large amounts of economic growth increasing demand is absurd. With affordability at all time lows in several, the oil price slump leading to stagnating wages in Alberta and Saskatchewan, and a shaky economy, foreign investment is simply not enough to keep things apart.
The reality of supply and demand can’t be wished away by optimism, no matter how much those in power wish it so. The economic signs are pointing to a Canadian real estate bubble, and with bubbles come correction.