Young People More Likely To Buy Homes

March 15th, 2010 by Potato

Hat tip to Jonathan Chevreau’s recent blog post: “Younger folk aged 18 to 24 are leading the charge, with those “very likely to buy” almost doubling to 15% from 8% per in 2009.

This is one of the signs of the end stages of the housing bubble.

Low/no downpayments allow people to buy earlier and earlier in their lives, stealing demand from the future, and driving up prices in the present. Skyrocketing prices convince people to buy now or be priced out forever. But there is a limit to it all, unless we start selling houses to children. Home ownership rates are at ~70%, and here we have 15% of people in the youngest (least home-owning) age bracket planning to buy (more than that, actually, since there’s another bunch in the “likely to buy” category below “very likely”), and presumably ~8% who bought over the last year. Won’t take too much more robbing of the cradle here before we run out of ways to bring demand up and hit a wall when high school students can’t join in bidding wars.

That is of course assuming that tightening of interest rates doesn’t do the job first (and now most bank economists are calling for that to happen before the end of the year).

I’ve been bearish on real estate for going on 3+ years now, and I’ve been hesitant to get too excited about the correction that I know must be coming because real estate moves in long, slow cycles. It’ll be years before the time to buy (the undershoot) finally arrives… plus, I get in trouble for being “optimistically bearish” from people with house lust that I’ve convinced to hold off (“the market’s up 20% this year! We could have bought last year, damn you!”). Nonetheless, I can’t help but feel that the stars are aligning for this nonsense to finally end.

Flaherty brought in some rules that I thought would be fairly minor tightenings to the mortgage market. Real basic, common sense tweaks, like that banks shouldn’t give someone all the money they can borrow at today’s rock-bottom rates, but instead have to qualify people on the still-low 5-year rate. I didn’t think there’d be anyone walking that close to the bleeding edge of affordability, but apparently CIBC is forecasting that this rule alone will have a ~5% impact on the mortgage market (hat tip: Canadian Mortgage Trends). The new rules also require a 20% downpayment for non-principal residences, which should help reduce the speculation out there.

Canadian Business had an article this week on “Why Buying a House is a Bad Investment”. Despite the title, it’s not nearly as bearish as I am, though that may be because they’re talking about “Canadian housing”, which is a tough concept, because the market in London and Charlottetown is vastly different than Vancouver or Toronto.

Even some realtors are starting to think that there may be, possibly, just the teenist whiff of a bubble happening, despite their inherent bias towards believing that real estate prices will always go up.

So I think the end is finally arriving (well, the end did arrive in the fall of ’08, but low interest rates drove it back for an age), and I can start to make some prognostications. Time may prove me wrong, but time’s a bitch like that. I predict that by the end of the year rates will begin moving back up as the need for the emergency stimulus eases and inflation returns. The real estate market will stall around midsummer; by this time next year, it will be clear that the market momentum is down, and by the fall of 2011, the media should start picking up on the slide. Since real estate moves in slow cycles you probably won’t find a decent time to buy until late 2013 (rent-to-buy of <150X), with the final bottom coming somewhere around 2016. For Toronto, top-to-bottom, my crystal ball says we’ll see a 35% drop — still about 10-15% above the 1996 trough in real terms, but a real kick in the nards for anyone that bought in the last few years.

These prophecies of doom are for entertainment only of course, and I’ll be changing my opinions as new data emerges… but now you know what I’m thinking.

In other eschatological news, Netbug has cancelled his World of Warcraft subscription. The end times, they are nigh.

4 Responses to “Young People More Likely To Buy Homes”

  1. ghandy Says:

    I share most of your views on this and, for full disclosure, I would be entertained to watch a lot of smug folks get a kick in the nards :-) However, the wrinkle that I wonder about (and you didn’t mention) is immigration. What role do you think immigration will play in housing prices over the next 5 years?

  2. ghandy Says:

    By the way, have you read “The Elusive Canadian Housing Bubble” by Alexandre Pestov at the Schulich School of Business?

  3. DH Says:

    Well, I sure hope you’re right. We will be listing our house next January, and won’t have to buy another.

  4. Potato Says:

    Well immigration, when it increases net household formation, increases demand for housing, which all else being equal, tends to raise prices. As immigrants tend to preferentially head for our larger cities, that also adds to urbanization and again, increases the price differential between Toronto and Vancouver and the rest of Canada.

    However, immigration isn’t enough to explain the crazy run up in prices we’ve had over the last decade. Our population is growing by less than 1%/yr, even with immigration, and that hasn’t really changed over the last decade. Indeed, two of the biggest spikes in immigration to Toronto correspond with crashing real estate prices. The US has about 2.5X less immigration than we do, but a higher domestic population growth rate, so their overall population growth rate is about the same as ours… and that of course didn’t stop a bubble from forming and popping.

    Indeed, immigration can be bad for bubble forming when it’s uneven. Look at Ft. McMurray: so many people rushed up there for the oil sector jobs. They couldn’t build houses fast enough, so the prices for what houses were there got bid up like crazy (and that’s completely without the need for innovative financing and the like — just crowd behaviour). But Ft. McMurray is not running out of land by any stretch of the imagination, nor is it becoming a desirable world-class city, or any silliness like that. I highly doubt the sky-high prices will last when the net migration there settles down.