Can immigration solve the looming demographic problem?
MAY 31, 2011
I recently explored the role of demographics in providing a strong tailwind to house price appreciation over the past few decades. Now as the Boomers age and more of them reach the phase of their life in which they become net sellers of real estate (65+), demographics are set to exert a drag on asset prices estimated at 1% per year for real estate.
A reader asked me to comment on the role of immigration in mitigating this looming imbalance in sellers and buyers. While I was working on it, I was alerted to a really neat article on a similar topic written by Stephen Gordon, Professor of Economics at the University Laval (hat tip to Jesse for the link). The article examines immigration and demographics quite broadly, but I will borrow very heavily from his insights to explore what this means for real estate in particular. Several of the graphs are exact recreations of those found in the highlighted link. I take no credit for these insights; I am merely reproducing some neat data that he uncovered and making the connection to real estate.
Let's start with an overview of Canada’s population distribution as of 2010:
And here is Canada’s population distribution with the start of the net buying and net selling phase highlighted. For the empirical data that indicates when net buying and net selling of real estate begins, please refer to this post:
We note that the most immediate and pressing gap is in the 25-45 age group. If we then examine the most recent immigration data, we find some encouraging data. Indeed the age of immigrants entering Canada is clustered in the very age group we’re concerned about:
However, as noted in the original article, the problem is one of scale. If we overlay the immigration data on the population data, we immediately see the problem:
Remember that net buying is most pronounced in the 20-40 year old age group. How many immigrants would be needed in that age group to match the peak Boomer demographic? The answer is 1.97 million. And how many would be needed in the 0-19 age group to match peak demographic? That answer is a staggering 3.34 million.
The current immigration rate is wholly inadequate in eliminating the coming demographic imbalance. While it certainly helps, it will be insufficient in entirely eliminating the headwind on house prices set to be exerted by the aging population.
Thank you once again to Professor Gordon for the excellent insights. His writings can be found over at Worthwhile Canadian Initiative.
Cheers,
Ben
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- house prices,
- immigration,
- real estate
7 Comments
In the chart "Immigrants to Canada by age", the numbers are for only one year. If we keep the same level of immigration for the next 20 years it will make a huge difference.
It will help. But keep in mind that it does not include emigration which is also highest in that demographic.
The "wave" will move to the right but the input remains fixed. Think of pouring demographic chocolate onto a moving conveyor belt.
Do you have an actuarial forecast of what the age pyramid will look like in 15, 20, 25 years? For the old timers, it isn't going to simply shift right until, in 40 years or so, the majority of Canadians are 90 years old. We are dying off, and it would appear we are dying off quickly.
So, our friend Rosie Rosenberg is suggesting QE 3 won't be called QE 3, but perhaps OT 2 (Operation Twist 2). Taking a page from the '50s, the Fed will buy up allthe ten year treasuries in order to assure the American home buying public that interest rates will virtually never go up.
Quite a different situation from Canada where Carney would like to raise rates to cool off borrowing. Barnanke wants to assure Americans that rates will stay low forever so that they will go out and buy houses with variable rate loans.
Now the question remains, just how much wiggle room does Carney have when his buddy to the south is playing kamikaze with the Fed's balance sheet. Worse yet, how much wiggle room will Carney need? If it isn't much, we are all in trouble.
These are the types of conversations we really shouldn't be having. Flaherty wasn't joking when he said our worries come from outside Canada. The simple fact is; the United States is the tornado, Canada is the mobile home.
"Carney would like to raise rates to cool off borrowing"
Actually I think he would prefer not to raise rates to cool off borrowing. I view the Bank of Canada's press release statement regarding debt levels as a warning shot across the bow for policymakers at all levels of government to ensure debt levels are constrained using targeted policies, to avoid the sledgehammer of a rate rise that would otherwise not be needed.
Or am I reading too much into this?
Don't confuse what Carney wants with what he says. He says what he says in order to signal a specific policy response. If he could get what he wants without saying anything, he would simply do what he wants.
Effectively, what the Bank says is at least as important as what it does. So yes, Carney would like to raise interest rates to cool off borrowing, but he can't as that would wreck the economy. Personally, I would much rather see consumer borrowing managed by regulators and not the Bank.