Immigration, shrinking households to bolster Canadian home prices: RBC

RBC says while the real estate pullback has yet to fully play out, two factors will save Canada from carnage akin to the 2008 financial crisis. (benedek via Getty Images)

Immigration and smaller households will keep Canadian home prices from spiralling as steeper borrowing costs weigh on the real estate market, according to Royal Bank of Canada economists.

Canada is in the midst of a "steep housing correction," RBC's Robert Hogue and Carrie Freestone wrote in a research note on Thursday.

From Toronto, to Vancouver, to Montreal, RBC points to slowing real estate trends as the Bank of Canada's interest rate hikes push potential buyers to the sidelines. It says while the pullback has yet to fully play out, two factors will save Canada's real estate market from carnage akin to the 2008 financial crisis in the United States.

"Immigration and shrinking households are among the forces that will bolster Canadian housing demand, and protect against a full-blown housing crash," Hogue and Freestone wrote.

Last year, Canada's population grew by more than one million people, including 607,782 non-permanent residents, and 437,180 immigrants. Looking to offset an aging population and a skilled labour shortage, Ottawa plans to increase immigration to 500,000 new arrivals each year by 2025.

"Due to immigration, Canada's population is growing much faster than other countries—over twice the pace of the OECD average over the past decade," the economists wrote.

"This surge, combined with shrinking household sizes, will strengthen demand for housing (whether owned or rented) and act as a powerful counter to sliding sales and prices—eventually putting a floor under the correction."

RBC notes Canadian households have been shrinking since before Confederation in 1867, due historically to parents having fewer children. The bank says the average household in 1851 had more than six people, falling to 4.3 people in the 1940s, and 2.4 people as of 2021.

"Since 2016, one-person households have become the most common, with nearly 30 per cent of Canadians now living alone," Hogue and Freestone wrote. "Though much of this is explained by population aging, a growing share of young Canadians are also opting to live alone—and are starting their families later."

While multi-generational homes have become more popular over the last decade, RBC says these represent just five per cent of new households.

'Back to the sidelines' for home buyers

Statistics released on Tuesday by the Canadian Real Estate Association (CREA) show national home sales fell 0.7 per cent month-over-month in July, as the number of newly-listed properties rose 5.6 per cent.

"Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada's mid-July rate hike and messaging regarding above-target inflation for longer than previously expected," CREA senior economist Shaun Cathcart wrote in a release accompanying the data.

"We're probably looking at another round of 'back to the sidelines' for some buyers until there's a higher level of certainty around interest rates going forward."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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